Top Performing Australian Fund Finds Shelter in Small-Cap Stocks

(Bloomberg) -- Investors are overlooking the growth potential of small and mid-cap stocks worldwide, according to the Australian manager of a top-performing global equities fund.

So-called SMID-caps, or the bottom 28% of developed-market equities in MSCI’s investment universe, offer an attractive growth alternative to volatile emerging market shares and pricey, high-growth large-cap stocks, said Ned Bell, chief investment officer at Bell Asset Management Ltd. and manager of the Bell Global Emerging Companies Fund.

“The oasis that no one invests in is small, mid-cap,” Bell said in an interview in Sydney last month. SMIDs are “very profitable, they’re growing well, and they’re generally not that expensive,” said Bell, who had just returned from an overseas trip where he met with more than 60 companies in two weeks, including U.S. government consulting services firm Booz Allen Hamilton Holding Corp. and Spanish software company Amadeus IT Group SA

The fund has jumped 28% this year and has outperformed 91% of its peers over the last 12 months, according to data compiled by Bloomberg. The Melbourne-based firm tends to find smaller companies in the “sweet spot” of their business cycle where they’re expanding revenue at 8% to 10%, said Bell.

Holdings in the fund include U.S. supermarket chain Kroger Co., French defense company Thales SA and Italian luxury sportswear designer Moncler SpA.

Investors looking for that same level of growth in large-cap shares would have to pay much higher prices, said Bell, who’s firm has about A$2.5 billion ($1.7 billion) in assets. SMID valuations have stayed grounded as more portfolios have drifted toward rallying large-cap growth stocks, he added.

“There’s a lot of mis-pricing in SMID,” he said. “You don’t have the ETFs and the passive funds buying these smaller companies.”

Large-cap shares also carry more risk because their earnings are more vulnerable to macroeconomic events, Bell said. Profits for most SMIDs are a “function of their franchise, rather than the direction of the market,” he added.

Investors looking for exposure into the space should ditch Australian small caps and re-allocate funds toward global SMIDs, according to Bell.

“They’ve done incredibly well, but they are insanely expensive,” he said of Australian small-cap shares. “In the global small, mid-cap universe, the quality is vastly higher.”

To contact the reporter on this story: Jackie Edwards in Sydney at jedwards160@bloomberg.net

To contact the editors responsible for this story: Lianting Tu at ltu4@bloomberg.net, Andreea Papuc, Margo Towie

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