Martin Pretty

I must say, I don't think either the Small Ordinaries or the Emerging Companies indices from S&P are great benchmarks for microcaps. Components of the Small Ords have an average market cap of $1.1 billion, with the largest up above $5 billion - and the weighting favouring the high end. The Emerging Companies index has an average market cap of $245m but a 25% weighting to resources means it is not aligned with many of the industrial-oriented funds and its trailing PE multiple is, according to S&P, -43 (yes minus 43), a figure that suggests to me a different stock composition from what you'd expect the type of funds listed above to be running with.

Mark Tobin

Hi Martin Thanks for the comment I will try and tackle each of your points raised Investors need something to measure the performance of the manager against and while outperformance versus a benchmark is by the no means the only criteria that could or should be used it is at least a starting point. So I think it is important to put benchmarks performances in the report. The managers also need some reference point or base if they charge performance fees so again benchmarks fulfil this function. If investors feel neither of these two benchmarks are relevant to the managers they could always perhaps use the long term returns of the Australian market (circa 10%) as an absolute measure to see how the managers track records stack up against it. I include the performance of the All Ordinaries Index to try and reflect this. These are the two most relevant benchmarks I am aware of for Australian microcap managers but if you have suggestions for more appropriate benchmarks for inclusion in the next report I will happily consider adding them for comparative purposes. All the above are active managers and you want active managers to actively allocate capital differently to the underlying index benchmark. You don’t want to be paying active fees for index hugging. So, their portfolio should look different in terms of stock selections and sector weightings versus the benchmark. Yes, there is a large weighting to resources and indeed technology in the emerging companies index. If these sectors are performing very well some of the active managers may actually underperform the index and vice versa if these sectors are under performing the managers may do well, but that is what you are paying the managers to do. Allocate your capital to the best performing companies and sectors in order to generate alpha. If we look at the emerging companies index the median market cap is shade under $200mil with the general industry standard being $300m and under being regarded as microcaps. So, with 50% of the index names well under that $300m threshold I think that the emerging companies index is at least a reasonable benchmark to compare these active microcap managers against.