Where fundies are finding value as the Small Ords nears a record

It took a while, but we’re nearly back there, folks. After almost two decades of muddling through equity market mediocrity, the S&P/ASX Small Ordinaries Index is on the cusp of a record high.

The “Small Ords” last hit 4,000 points in December 2007, just before the global financial crisis, and only reclaimed that level in January 2026. In between, it was a tough two decades. Small companies were weighed down by a prolonged slump in commodity prices, repeated capital raisings, and global capital chasing the U.S. technology story.

With the index going effectively nowhere on a price basis over that period, returns largely came from dividends. At around 2.5% per annum, that’s hardly something to cheer about. Of course, that’s performance at the index level – skilled active investors, in many cases, did far better.

The question now is whether Australia’s emerging companies can sustain their recent outperformance and finally deliver higher returns to justify the higher risk.

To dig into what’s driving the rebound – and where the best opportunities lie from here – Livewire spoke with three active small-cap fundies:

A resources-led rally

There’s little debate that commodities have played a big role in dragging the Small Ords back toward record price levels.

“Taking a step back it is important to remind ourselves about the year that was. Small Ordinaries delivered a 25% return and a significant contributor to this was resources. Small Resources were up 73%. Small Industrials rose 9%. The divergence in returns was significant,” Thomson says.

Gold, in particular, did the heavy lifting.

“The story of 2025 for small caps was gold. The gold producers delivered approximately 58% of the Small Ordinaries return for 2025. As the price of gold has risen, earnings upgrades have been significant and have driven share prices higher,” she says.

While some of that move was speculative, Thomson argues the drivers were not purely cyclical.

“Some of the rise is structural. The de-dollarisation trade is fully in swing; central banks continue to buy gold. In addition, wartime-like fiscal deficits have aided the debasement trade and flight into real assets,” she says.

Nguyen agrees that resources dominated headline returns, but says fundamentals mattered just as much.

“From a quantitative perspective, earnings yields and earnings revisions and upgrades were the two primary factors that drove the small cap market’s return last year. This tells you that: 1) getting your earnings forecast correct; and 2) not overpaying for companies were the major drivers of returns last year. That’s basically stock picking to a tee,” he says.

But Datt argues that focusing solely on the rampaging moves in commodities risks missing what’s happening elsewhere in the market.

“Whilst commodity price spikes in gold and copper have undoubtedly provided the initial ‘beta’ boost to the Small Ordinaries, attributing the rally solely to factor exposure is inaccurate,” Datt says.

“We are seeing a genuine divergence where the underlying quality of earnings is finally catching up to price action,” he says.

Is this time different?

Given the Small Ords’ long history of false starts, scepticism is understandable. Datt argues the rally itself was predictable once valuation gaps became extreme.

“This rally is familiar and was in many ways, predictable over a long enough timeframe,” Datt says.

“We observed that large cap valuations become increasingly stretched driven by a range of factors. Accordingly, a significant value gap emerged between large and small cap valuations which is an anomalous state historically,” he says.

While the index has rebounded, Datt says the valuation gap isn’t gone. P/E ratios for large and small caps look similar on the surface, but they don’t account for the stronger earnings growth small caps are expected to deliver.

Nguyen is more cautious about extrapolating recent performance.

“Unless we have a prolonged period of interest rate cuts, which is not our base case, I don't see small caps materially outperforming large caps to the same extent that they did last year,” Nguyen says.

That said, he still sees relative appeal.

“At the start of 2025, we were of the opinion that small cap equities looked very attractive given three consecutive years of relative underperformance,” he says.

“This meant the small cap index was trading at a 20% discount to its large cap counterpart despite offering twice as much earnings growth."

Thomson avoids making explicit cycle calls, but sees echoes of earlier turning points.

“It would be overconfident of us to state whether this time is different but there are instances in time which appear similar - 2016 started with a resources rally which continued through the year,” she says.

Managing risk as commodities heat up

With multiple commodities running hard, the risk of overheating is front of mind. Nguyen takes a pragmatic view on gold.

“I have no idea what the long-term price of gold should be, and I doubt many people do,” Nguyen says.

“I think you make money in gold by buying stocks that have good quality resources, trustworthy management teams, and buying these stocks when they trade at a discount to their intrinsic value,” he says.

Nguyen adds that Tyndall prefers producers with a clear pathway to shareholder returns - such as Vault Minerals (ASX: VAU) - rather than management teams “using cash to buy growth.”

Datt stresses discipline as prices rise.

“In resources, we try to avoid buying ‘lottery tickets,’” Datt says.

“When multiple metals run in tandem, the herd often ignores the underlying cost curves and asset quality."

Thomson argues that not all metals are moving for the same reasons.

“While many metals appear to be running in tandem, there are idiosyncratic reasons for the moves higher,” she says.

“Metals like copper, lithium, aluminium and uranium are being driven by heightened electrification and energy demands on the back of significant AI capex which appears will be sustained into the years to come."

5 small caps the managers like right now

As capital has rotated into resources, all three managers see opportunities opening elsewhere in the small-cap universe, often in areas that have been left behind.

For Thomson, the sell-off in growth names has created entry points.

“The market rotation into resources has delivered several opportunities elsewhere in the market,” she says.

“Life360 (ASX: 360) more than halved since its peak in October 2025. Post their update on the 23rd of January - active user growth concerns abated- the stock has turned higher and we still think there is some way to go in the stock."

Eiger also likes Navigator Global Investments (ASX: NGI), which Thomson believes is finally being recognised by the market. 

“The stock has begun to re-rate from its single digit price-earnings multiple,” she says.

Datt believes some of the most attractive ideas sit well outside the commodity complex.

“While resources have stolen the limelight, the real ‘blue chips of tomorrow’ are often found in the growth and value pockets of the Small Ordinaries, such as technology and healthcare,” Datt says.

He nominates PEXA (ASX: PXA) as a prime example.

“The thesis is simple: a highly cash-generative domestic core provides the war chest to fund a low-risk, high-reward expansion into the UK market. It offers an infrastructure-like revenue profile with the scalability of a SaaS business, a rare combination in the small-cap space,” he says.

Another is Monash IVF (ASX: MVF).

“The fundamental demand for assisted reproductive services is robust, driven by the trend of later motherhood,” Datt says.

Nguyen sees value emerging in consumer-facing stocks after a bruising period, highlighting automotive dealer Peter Warren (ASX: PWR).

“The company is currently generating margins at half pre-COVID levels while the rest of the industry’s profitability has returned to pre-COVID levels, while larger rival AP Eagers (ASX: APE) is earning well above pre-COVID levels,” he says.

“With property asset backing more than half the market cap, a new executive team in place with a mandate to make changes, and on depressed multiples and depressed earnings, I think the stock offers a compelling risk reward proposition.”

When do you turn defensive?

Despite the improving backdrop, none of the managers are complacent. Thomson stresses valuation discipline, while keeping a close eye on U.S. interest rates.

“An interesting statistic I heard via a podcast recently is that around 80% of the fall in a bear market is due to valuation multiple compression,” she says.

Datt highlights liquidity as a persistent risk.

“On a company level, we turn defensive when we see earnings quality decline for example, if a company is growing revenue but margins soften concurrently. This low-quality growth may mask various issues and headwinds within the business itself.”

Nguyen cautions against trying to predict shocks and urges investors to focus on what they can control.

“Our strength is finding quality stocks trading at a discount to their cash flow generation … After that, you overlay risk management tools to monitor and manage your factor risks, so that the portfolio outcome is driven by stock selection, and not embedded factor risk," he says.

True or false: Will the Small Ords outperform over the next five years?

To finish, we asked the fundies whether they expect the Small Ords to outperform the ASX 200 over the next five years. For Datt and Nguyen, the answer is an unequivocal "true."

“The Small Ordinaries universe is the most target-rich environment I’ve seen in a decade,” Datt says.

"It won't be a straight line, and there will be volatility, but the sheer innovation and agility within the small-cap universe, we believe, will allow it to outpace the 'lumbering giants' of the top 200 over a five-year horizon.

Nguyen also sees the odds tilted in small caps’ favour.

“I can’t see banks outperforming given their starting valuation and the limited earnings growth on offer,” Nguyen says.

“While small cap Industrials are offering fair value in aggregate, there are still many great companies to be found which are trading at a discount to their intrinsic value if you dig deep enough,” he says.

Thomson remains measured.

“Who knows?” she says.

“What we do believe is that the Small Ordinaries presents a compelling landscape to deliver alpha over the long term."