Why are investors abandoning ASX small-cap shares in droves?

Contrarian fund manager Allan Gray says the ASX Small Ordinaries Index is at its lowest point relative to the S&P/ASX 100 Index since it was launched in April 2000.

asx share price resignation represented by man kicking miniature man through the air

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Key points

  • Contrarian fund manager Allan Gray says investors are abandoning ASX small-cap shares for the perceived safety of ASX large-cap shares 
  • Allan Gray says the ASX Small Ordinaries Index is at its lowest point relative to the ASX 100 Index since it was launched in April 2000
  • Among the small-caps that Allan Gray is invested in are G8 Education, Peet, and Nufarm 

Contrarian fund manager Allan Gray says investors are swapping ASX small-cap shares for the perceived safety of ASX large-cap shares due to market volatility caused by the choppy economy.

In Allan Gray's June quarterly report, managing director and chief investment officer Simon Mawhinney says this trend has been evident for several months.

ASX small-cap shares at 'lowest point since April 2000'

The chart below shows the 12-month performance of the S&P/ASX Small Ordinaries Index (ASX: XSO) compared to the S&P/ASX 100 Index (ASX: XTO).

Mawhinney says:

Over recent months, equity investors have gravitated to the perceived safety of large companies at the expense of 'riskier' smaller companies.

The Small Ordinaries Index is now at its lowest point relative to the ASX 100 Index since April 2000 when the Small Ordinaries Index first launched.

ASX small-cap shares typically have market capitalisations of a few hundred million up to $2 billion.

The Small Ordinaries Index represents 200 companies ranked 101-300 in the S&P/ASX 300 Index (ASX: XKO).

They are generally younger companies with greater growth prospects than the large caps.

However, their share prices tend to be much more volatile.

Mawhinney says:

While the Allan Gray Australia Equity strategy does own some large companies, it has a significant skew towards medium-sized and smaller companies.

It is here that we think the greatest upside potential exists.

In which small-caps is Allan Gray invested?

Among the top holdings (1% of the fund or more) of Allan Gray's Australia Equity Fund (Class A and B units) are ASX small-cap shares G8 Education Ltd (ASX: GEM) at $1.06 per share, Peet Ltd (ASX: PPC) at $1.21 per share, and Nufarm Ltd (ASX: NUF) at $5.33 per share.

The fund manager is also invested in several mid-cap shares, including Lendlease Group (ASX: LLC).

Allan Gray is a contrarian investment manager, which means it goes against 'the herd'.

It looks for opportunities that the market is missing or ignoring due to fear, complacency, or simply a terrible performance in recent years.

That's the case with Lendlease, and Mawhinney puts it pretty plainly:

Lendlease's share price performance has been woeful and makes the performance of the Small Ordinaries Index look like that of an artificial intelligence chip designer.

Allan Gray analyst Tim Morrison says Lendlease's returns to shareholders have been "spectacularly
poor". But the fund manager sees reasons for optimism, as my Fool colleague Tony reports.

The five biggest positions in the fund are large-cap shares Newcrest Mining Ltd (ASX: NCM), Woodside Energy Group Ltd (ASX: WDS), Alumina Limited (ASX: AWC), QBE Insurance Group Ltd (ASX: QBE), and Ansell Limited (ASX: ANN).

Motley Fool contributor Bronwyn Allen has positions in Alumina, Ansell, and Woodside Energy Group. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Ansell. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Small Cap Shares

A woman jumps for joy with a rocket drawn on the wall behind her.
Small Cap Shares

Down 40% in 2024, why is this ASX small-cap stock rocketing 32% today?

This small cap is smelling like roses on Thursday.

Read more »

a young woman raises her hands in joyful celebration as she sits at her computer in a home environment.
Small Cap Shares

These small cap ASX shares could rise 35% to 75%

Analysts are tipping these shares to rise strongly from where they currently trade.

Read more »

A bearded man holds both arms up diagonally and points with his index fingers to the sky with a thrilled look on his face over these rising Tassal share price
Small Cap Shares

ASX small-cap stock rockets 25% on 'another period of profitable growth'

Why is this small cap getting a lot of attention on Wednesday?

Read more »

Two kids in superhero capes.
Small Cap Shares

Are ASX small-cap shares back in vogue amid a big shift?

Could a rotation out of large-caps be underway?

Read more »

Three children wearing athletic short and singlets stand side by side on a running track wearing medals around their necks and standing with their hands on their hips.
Share Gainers

3 ASX small-cap shares that soared 250% to 675% in FY24

ASX small-cap shares can offer potentially higher price growth but typically involve more risk.

Read more »

A man in a business suit holding a baby conducts a task on his phone
Small Cap Shares

Why I'm bullish about this exciting ASX small-cap share

The foundations are compelling with this stock.

Read more »

The Two little girls smiling upside down on a bed.
Small Cap Shares

Is it time to jump back into ASX small-cap shares?

One fund manager has revealed why it could be time to invest in smaller stocks.

Read more »

three children wearing superhero costumes, complete with masks, pose with hands on hips wearing capes and sneakers on a running track.

3 ASX small-cap shares I think have explosive growth potential

Here's my list of 3 ASX small-cap shares for growth.

Read more »