It’s been a challenging period for small cap companies. Despite delivering a positive return of 16% in Australia, in the past four years to November 2024, their total return (income and capital growth) underperformed large caps by 8%pa in Australia, 6%pa globally and 5%pa in the US.
In this context, Wilson Asset Management’s proven investment process and active management have delivered strong results across each of our small and mid-cap listed investment companies (LICs). The annualised four-year gross performance to November 2024 in WAM Capital (ASX: WAM), WAM Research (ASX: WAX) and WAM Microcap (ASX: WMI) of 12.6%, 16.1% and 11.7% respectively, has been above the S&P/ASX 100 of 10.7%. All LICs have also vastly outperformed the S&P/ASX Small Ordinaries Index of 4.3%pa and Small Industrials of 3.8%pa.
Where to from here? Since the market began pricing in an imminent interest rate cut in the US six months ago, US small caps (S&P 600) generated a total return of 17%, outperforming large caps by almost 6%. We forecast a Reserve Bank of Australia rate cut around March/April 2025, with additional rate cuts throughout the year. The strong performance of small cap companies in the US following a rate cut illustrates how it can be a tailwind for small caps in Australia.
Read this article for more about what’s driving the relative underperformance of small cap companies and how they could shift to become a tailwind in 2025.
Stock Spotlight
Block Inc.
(ASX: SQ2)
Block Inc. offers a suite of financial services and products including Square which assists businesses in processing transactions and to achieve their growth aspirations. During the month, Block Inc. announced its September 2024 quarter results, noting growth in gross profit by 19% year-on-year to USD2.25 billion. The company’s profitability improved during the quarter, delivering adjusted earnings before interest, taxes, depreciation and amortisation (EBITDA) of USD807 million, up 69% year-on-year which beat market expectations. We continue to expect Block to outperform its initial gross profit guidance for 2024 with a strong outlook for 2025 and also see a chance that the company enters the S&P 500 Index in the United States.
Gentrack Group
(ASX: GTK)
Gentrack Group is a technology provider to the world’s largest energy and water companies. During the month, Gentrack Group reported its full year results to 30 September 2024, with year-on-year revenue growth of 25.5% driven by robust growth in its utilities and airports divisions which beat market expectations. We remain positive on Gentrack Group and the outlook for the company and believe the company’s strong cash position can allow the business to make earnings accretive acquisitions.
