Low Correlation Investing in Small Caps with Datt Capital

Why Low Correlation Matters for Investors

Correlation is one of the most important but least understood factors in portfolio construction. For investors looking for managed funds in Australia or high return investment opportunities, the relationship between a fund and the rest of the portfolio can influence long term outcomes more than any single performance number.

The Datt Capital Small Companies Fund behaves differently from the broader Australian market and from most ASX small caps funds. This is not accidental. It is the result of a research program focused on idiosyncratic drivers and a benchmark agnostic portfolio construction approach that prioritises absolute outcomes.

What the numbers show

The Small Companies Fund has a correlation of 0.36 with the S&P ASX Small Ordinaries Index. This is less than half the average correlation of 0.77 across the small-cap peer group.

Across individual fund comparisons, Datt’s average pairwise correlation is 0.26. Several readings are near zero. Bennelong is 0.03. Lennox is 0.02. Jencay is negative 0.04.

This indicates that the Fund’s return stream is shaped by company-specific drivers rather than the same broad forces that influence most small company investment funds in Australia. By comparison, peer funds such as Tribeca and Montgomery have a correlation of 0.97. This reflects highly similar positioning and behaviour.

For investors searching for small companies funds, investment firms Australia wide rarely deliver this level of independence.

How Datt achieves low correlation

Low correlation reflects a deliberate investment philosophy and a research approach that focuses on fundamental drivers, not benchmark exposure.

A distinct research focus

The Fund invests in areas that receive less attention from large investment companies in Australia. These include smaller, capacity constrained microcaps and off-benchmark names. These businesses often have limited coverage and more stock-specific outcomes. This reduces exposure to market-wide trends.

Avoiding crowded trades

Many absolute return funds and small-cap managers tilt heavily into momentum or the standard quality growth categories. The Datt Capital process limits exposure to these crowded factors. This prevents the portfolio from moving in tandem with peers.

Benchmark agnostic portfolio construction

Position sizes reflect conviction and risk reward, not index weights. The portfolio is built around independent investment theses across different sectors. This naturally lowers correlation with the ASX small caps universe and with other fund managers in Australia.

Alignment with investors

The investment team co-invests alongside clients. The Fund size is capped to ensure access to less liquid opportunities. This alignment supports independent decision making and long-term thinking. Incentives are tied to absolute performance, which encourages patience and discipline.

The result is a portfolio driven mainly by idiosyncratic factors rather than by the broader small-cap factor.

Why this matters for investors

Adding a low correlation strategy to an equity portfolio improves diversification and reduces overall portfolio volatility.

Using a simple illustration:

• A typical small-cap fund with correlation near 0.77 produces estimated volatility of 18.8 percent.
• Pairing the same sleeve with Datt at 0.36 reduces that volatility to about 16.5 percent.

This is a reduction of roughly 12 percent at the same expected return. A lower volatility profile can improve risk adjusted returns and create a smoother investment experience.

Diversification benefits include:

• Shallower drawdowns when market-linked small-cap funds fall together
• Less crowding across managers due to different investment hunting grounds
• ore consistent returns driven by company-level catalysts

For investors seeking low risk investments in Australia without giving up long term growth, correlation is a critical factor.

A few caveats to consider

Correlation statistics change over time. They do not guarantee future independence. Low correlation does not eliminate the possibility of losses. It means the drivers of return differ on average. To feel the diversification benefit, investors must allocate a meaningful proportion of their small-cap sleeve to a low correlation strategy.

Bottom line

The Datt Capital Small Companies Fund behaves differently because its research program, portfolio construction, and alignment model are different. While many small-cap funds in Australia move together, Datt provides a differentiated return stream that strengthens diversification and supports capital preservation.

For performance history and portfolio details, see our Small Companies Fund page or explore our latest performance update. Investors can also review ASX small caps insights from our Ausbiz interview for further context.