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What Emanuel Datt Covered at MIC Digital

On 6 May, Chief Investment Officer Emanuel Datt presented at the digital conference, examining why Australian small companies remain one of the most under-researched and mispriced segments of the local market, and what that means for investors evaluating active management in the small cap space.

The session covered three areas directly relevant to advisers and investors considering Australian small cap funds.

First, why small caps are structurally under-researched. Analyst coverage thins considerably below the ASX100. Many ASX small caps carry zero sell-side coverage. Prices can lag business fundamentals for extended periods, creating a persistent window of opportunity for managers willing to do primary research work. For investors in small companies, this structural gap is where alpha is generated.

Second, how deep fundamental research reveals what passive vehicles miss. Australian small cap index funds and benchmark-hugging managers inherit the inefficiencies of the market. Active managers with proprietary research processes can identify and act on undervalued stocks in Australia before they are widely recognised. The distinction between genuine active management and closet indexing is critical for advisers evaluating small cap investment research.

Third, why active management focused on outperforming the index continues to generate alpha. Not all active management is truly active. Closet indexers charge active fees for near-passive outcomes. The session provided a practical framework for separating genuine active managers from benchmark-huggers in the Australian small companies space.

Why Now

The framework matters in any environment, but the current environment makes it urgent. Three factors are converging simultaneously for investors in ASX small caps.

Ongoing geopolitical tensions are creating energy sector dislocation that active managers can exploit through portfolio construction, unlike passive vehicles constrained by index weights. Small company investment funds with genuine flexibility can position meaningfully in ways that an Australian small cap index fund cannot.

Small cap valuations are at historically wide discounts relative to large caps, a situation observed only twice in the past 30 years: once after the dotcom bubble and once after the GFC. In both instances, Australian small companies outperformed significantly over the following three to four years as valuation multiples normalised.

Private equity is sitting on record dry powder actively targeting discounted public market companies. Active managers who identify these targets ahead of a bid capture the full return. This is small cap investment research translating directly into risk-adjusted outcomes for investors.