In contrast to an ETF, the Spatium Small Companies Fund¹ seeks to hold an equally-weighted book of companies that Spatium Capital considers to be the best opportunities to outperform the Small Ordinaries index, as demonstrated by comparing to the iShares Small Ordinaries Index ETF (below).
Reasons why you should be cautious with holding a small cap ETF (domestic or global):
• Volatility = Opportunity: ETFs are less suited to small caps due to their propensity to be more volatile and mispriced relative to their more highly-scrutinised large-cap big brothers and sisters. The alpha opportunity in small caps derives from the fact that these companies are often striving for greater market share, thereby their volatility profile (and if identified correctly, alpha opportunity) is higher given their strategic efforts can have significant price impacts on their valuations.
• Limited Liquidity: ETFs are traded on listed stock exchanges like the individual stocks they hold and, like any listed company, their liquidity profile depends on trading volume. Naturally, given their smaller market cap, small companies may have lower trading volumes and less liquidity compared to larger companies. This can lead to wider bid-ask spreads for ETFs tracking small companies, potentially resulting in an ETF having difficulty mirroring exactly the index return as it seeks to acquire or dispose of companies. Further, investors of the ETF product must also be mindful of the liquidity of the ETF itself, noting that as of 9 September 2023, the rolling 90-day average ETF volume of the iShares S&P/ASX Small Ordinaries ETF (ISO.AX) was only $351,803.52.
• Limited Information: Small companies often have less-scrutinised publicly available information compared to larger, more established firms. This can make it challenging for a small cap ETF as the typical process of extensive price discovery is not occurring, thereby exposing the ETF to holding companies may be more susceptible to the impact of new market information, amplifying volatility.
• Lack of Active Management: Many ETFs passively track their underlying indices, meaning they do not employ active management strategies. While this can result in lower expense ratios compared to actively managed funds, it also means that ETF managers do not make specific investment decisions to optimise returns or manage risk, which can be important in the small-cap segment where stock selection can be critical.
MEDIA CONTACTS
Nicholas Quinn
Spatium Capital
Director & Co–Portfolio Manager
0437 175 038
nicholas.quinn@spatiumcapital.com
https://www.linkedin.com/in/nicholasquinn-spatiumcapital/
Jesse Moors
Spatium Capital
Director & Co–Portfolio Manager
0422 040 119
jesse.moors@spatiumcapital.com
https://linkedin.com/in/jessemoors
SQM awarded Spatium Capital an Approved rating for its Small Cap Fund in 2022 and is currently reviewing the Fund for its annual review.
SQM’s Fund description of Spatium Capital:
The Spatium Capital Small Companies Fund (the “Fund”) is an actively traded portfolio of approximately 25-to-40 listed companies, turning over each position in the portfolio, on average, every 30-to-45 days.
The Fund seeks to identify and capitalise on mispriced and short-term equity price dislocations.
The trading strategy uses a quantitative model developed by the Directors over the past 10+ years. In terms of the commonly known factors, momentum, small size, and mean reversion are considered elements of the strategy. No fundamental research or sector views are taken.
SQM Research considers this strategy will have a low correlation with many other small-cap Funds over the long term.
1. The Spatium Small Companies Fund is available to Australian Wholesale Clients as defined in the Corporations Act (Cth) and to Singaporean Accredited Investors or certain other persons prescribed under Section 305 of the Securities and Futures Act (Singapore).
2. Inception for the Spatium Capital investment strategy is 1 July 2018 (via an SMA) and the Spatium Small Companies Fund is March 2020. Performance is net of fees, before tax, and assumes reinvestment of distributions. Past performance is not an indicator of future performance.