Venn Brown sat down with Matt Griffin, Portfolio Manager, Australian Small Companies at Maple-Brown Abbott, to discuss key events, market performance and surprises of 2024, opportunities and outlook for 2025, and any advice he has for retail investors and small-cap management teams.
2024 was tough on small caps: Over the last three years, small caps have underperformed large caps by 27%. The underperformance has largely been driven by earnings, which for small caps finished 2024 down for the second year in a row.
Best performers: The best performers in Maple-Brown Abbott’s small-cap fund were the growth-focused tech stocks like Life360 and Pro Medicus. While most small caps saw earnings decline, these growth stocks are still delivering double-digit growth. Spartan Resources was another winner following the successful turnaround by the new management team.
Outlook for 2025: If employment remains strong and earnings turnaround, 2025 should be a better year for small caps. Small caps typically follow a five-year cycle; after bottoming in late 2023, the sector is due for an upswing.
Top picks: Growth – ASX:CDA, value – NZSE:TWR, speculative: ASX:MMI. Industries to watch: Aged care, healthcare, childcare, industrial and mining services.
Biggest risks for 2025: Employment remains the biggest risk to a small-cap turnaround. As long as employment remains high, the outlook for EPS growth looks positive. Increasing government intervention could benefit small caps as the government and public focus on large-cap profits and cost of living, thereby putting a handbrake on growth.
Advice for retail investors: Passive Australian small-cap funds and ETFs will likely underperform due to fundamental flaws in the construction of the small-cap index. Over the long term, the median small-cap fund has outperformed the small and large-cap indices and the median large-cap funds.
Advice for small-cap managers: Focus on earnings. Earnings drive small-cap valuations. Management focusing on the share price is a red flag for investors and suggests either a short-term focus or a coming capital raise.