Aussie small caps: the hidden gold mine you're missing

Steve Johnson | Forager Funds

The ASX is expensive, yes? Correct, but only if you're looking at the big names. The real opportunity? It’s hiding in plain sight: Australian small-cap stocks. While large caps have been marching higher and grabbing headlines, a treasure trove of undervalued gems lies buried beneath.

This disconnect between small and large-cap stocks has created an interesting dynamic. On the surface, the market looks expensive, but beneath the surface, a different story is unfolding; one that many investors are overlooking.

ASX All Ordinaries Index vs. ASX Small Ordinaries Index

It’s natural to feel uneasy when the market is at an “all-time high,” but history tells us that this is a normal and expected part of investing. Over the past decade, the Australian market has delivered an average annual return of around 9%, meaning it has regularly pushed past previous highs to reach new ones. In such an environment though, where the index makes it look like everything is expensive, knowing where to look can make all the difference.

The Challenge of the Small-Cap Index

The small-cap index is an interesting mix - some winners, some duds (think speculative, low-quality businesses that lack profitability or a sustainable competitive advantage). That's why active management is critical for this sector. You need someone who can sift through the noise and find the companies with potential. Many of the best opportunities exist in specific sectors or individual companies that require deeper research and decision making.

Why invest in small caps now?

• Undervalued: Precisely because the small-cap index has performed so poorly, many small-cap businesses are trading at bargain prices.
• Growth potential: Niche tech, specialised industries, and select consumer-facing companies are starting to get investor attention, resulting in substantial share price appreciation
• Active advantage: Forget passive investing. This is where active managers thrive, uncovering pockets of opportunity.

What is Forager's Edge:

At Forager, we don't just follow the crowd when it comes to small-cap investing. We dig deep to find:

• Stock mispricing: We identify undervalued companies that have big growth potential before the market does (like Catapult).
• Earnings turnarounds: We capitalise on companies poised for recovery before they appear on others’ radar (like Bravura).
• Structural growth stories: We invest in long-term winners before the market catches on (like Praemium).

The Proof is in the Pudding:

Unlike their large-cap counterparts, Morningstar data shows that the average actively managed small and mid-cap funds outperform the index. And the Forager Australian Shares Fund? It is even further ahead since inception. The track record speaks for itself:

Source: Morningstar, as at 28 February 2025

The above figures assume that all distributions have been reinvested and are net of all fees. Past performance is not indicative of future performance and the value of your investment can rise or fall

Don't Miss Out:

The investment team at Forager believes that the small-cap market is still ripe with opportunities and continues to research relentlessly to find them.

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All prices and analysis at 14 March 2025.  This document was originally published on Livewire Markets website on 14 March 2025. This information has been prepared by The Trust Company (RE Services) Limited (ABN 45 003 278 831 and AFSL No. 235150) which is the Responsible Entity and issuer of the Forager Australian Shares Fund (ARSN No. 139 641 491). The content is distributed by WealthHub Securities Limited (WSL) (ABN 83 089 718 249)(AFSL No. 230704). WSL is a Market Participant under the ASIC Market Integrity Rules and a wholly owned subsidiary of National Australia Bank Limited (ABN 12 004 044 937)(AFSL No. 230686) (NAB). NAB doesn’t guarantee its subsidiaries’ obligations or performance, or the products or services its subsidiaries offer.  This material is intended to provide general advice only. It has been prepared without having regard to or taking into account any particular investor’s objectives, financial situation and/or needs. All investors should therefore consider the appropriateness of the advice, in light of their own objectives, financial situation and/or needs, before acting on the advice.  Past performance is not a reliable indicator of future performance.  Any comments, suggestions or views presented do not reflect the views of WSL and/or NAB.  Subject to any terms implied by law and which cannot be excluded, neither WSL nor NAB shall be liable for any errors, omissions, defects or misrepresentations in the information or general advice including any third party sourced data (including by reasons of negligence, negligent misstatement or otherwise) or for any loss or damage (whether direct or indirect) suffered by persons who use or rely on the general advice or information. If any law prohibits the exclusion of such liability, WSL and NAB limit its liability to the re-supply of the information, provided that such limitation is permitted by law and is fair and reasonable. For more information, please click here.