The move from Viridian and CFS to provide personal advice in a scaled manner highlights a growing willingness within the industry to fix its own problems in lieu of waiting for the government.
Private markets are worth around $14 trillion globally, ASIC believes. It’s not sure, and that uncertainty hints at the wider problem – private markets, and their effect on public ones, is still largely a mystery.
Factors to repel small cap ‘zombies, fallen angels and glamours’: Invesco
While Australian small cap’ companies have always possessed outsized potential returns due to their dynamic nature and the operating leverage they wield, the prospect of rate cuts in 2025 – which will free up the kind of capital these companies depend on – now brings that potential into sharp focus.
According to Invesco, adjustments to investment strategy leading up to this shift need to be intentional, and calculated. If there’s one sector that really benefits from active management, the team writes in a recent whitepaper, it is this one. And by employing factors as part of an active management portfolio management regime, managers can avoid what it calls the “fallen angels”, “zombies” and “glamours” of the small cap sector, and achieve a significant better return profile in the process.
These ghoulish profiles refer to different cohorts of companies in the small cap sector that can be a drag on portfolios. With the help of active management that employs factors like momentum, growth and quality, however, these ‘nightmare’ actors can be avoided.
Fallen angels, the whitepaper explains, are companies that were bigger than other small caps but “have fallen from grace” and now sit within the small cap sector. “Typically, when this occurs the new entrant will have poor share price and fundamental momentum,” Invesco explains, adding that the company might still have a large weight in the small cap index because it’s still a relatively large company.
Zombies, on the other hand, are companies that are “unable, or barely able” to cover their operating or interest expenses, with typically high levels of debt and low levels of profitability. These companies make up as much as 1 in 7 small cap entities.
While zombies can be characterised as “anti-quality”, The glamours of the small cap world are what Invesco thinks of as “anti-value”.
“Glamour companies are those companies that are trading on extremely high valuations with relatively high earnings growth expectations. These companies are often “hyped up by both the market and media,” the whitepaper states, adding that they can often be highly speculative and investors typically pay too much for the stocks in the hopes of seeing growth that don’t often materialise.
The factor factor
Active management benefits small cap portfolios by using factors to avoid a “naive” capitalisation benchmark that includes fallen angel, zombie and glamour companies, Invesco believes.
“Australian smaller companies can offer great investment opportunities, but navigating this sector requires a thoughtful approach,” the whitepaper states. “By focusing on proven investment factors – momentum, quality and value – investors can effectively sidestep these pitfalls and capture superior returns.
“Our analysis underscores that employing a systematic, factor-base approach enables investors to harness the true growth potential of smaller companies while avoiding the traps of traditional indices,” Invesco continues.
“By adopting this method, investors can achieve high active returns net of fees and successfully navigate the complexities of small cap investing.”
