Low Correlation Investing in Small Caps with Datt Capital

Why Low Correlation Matters for Investors

Many investors compare small cap funds by looking at performance tables. What often gets overlooked is how a fund behaves alongside the rest of an equity portfolio. Two strategies with similar returns can deliver very different outcomes once you consider how closely they move together.

This is where the Datt Capital Small Companies Fund is different. The Fund has produced a return profile that shows almost no connection to the broader Australian market or to the usual ASX small cap group. It moves for reasons that are specific to the companies we hold, not for reasons linked to broad index direction.

What the numbers show

When we compare the Fund against the S&P ASX 300 Total Return Index, the correlation is negative 0.02. This is effectively zero. Most small cap funds sit much higher. The peer group’s average correlation is about 0.62.

Across the full comparison set, 83 percent of Datt’s pairwise correlations sit in a narrow band between negative 0.20 and positive 0.20. Meanwhile, many peer to peer readings in the table are 0.70 to 0.90. These reflect funds that move together when the market does.

For investors looking to invest in small companies or add diversification to an existing equity portfolio, a profile like this is rare.

Why the Fund behaves differently

The Fund’s low correlation is the result of the way Datt Capital researches and constructs the portfolio.

A focus on under researched parts of the market

We explore areas that receive less attention from large investment firms in Australia. These include off benchmark names and capacity constrained companies where pricing is less efficient. This naturally drives stock specific outcomes rather than index like behaviour.

A catalyst heavy research program

We look for opportunities linked to clear business level catalysts. Examples include contract wins, restructures, product pipelines or capital allocation changes. These catalysts move on their own timelines and do not depend on index cycles.

Staying away from crowded style factors

We avoid large, correlated exposures to momentum, beta or the classic resource cycle. This helps reduce similarity with other small company investment funds in Australia.

A portfolio built for absolute returns

The Fund holds 15 to 25 positions with high active share. Position sizes reflect conviction and risk reward, not benchmark weights. This benchmark agnostic structure is one of the biggest contributors to low correlation.

The Fund’s correlation readings with well known strategies such as Betashares Small Companies ETF, Dimensional Small Company Trust and several other fund managers in Melbourne sit near zero. This reflects genuine independence in portfolio construction.

Alignment that reinforces discipline

The team invests alongside clients. We limit capacity to protect the strategy’s ability to operate in less liquid parts of the market. This alignment supports independent decision making and reduces the pressure to follow what peers are doing.

Why this matters for portfolios

Low correlation improves portfolio resilience. It does not only reduce volatility, it improves the way a portfolio behaves when markets turn difficult.

A simple example: pairing a typical small cap fund with an average correlation of 0.62 results in estimated volatility of about 18 percent. Pairing the same sleeve with Datt’s negative 0.02 correlation produces about 14 percent.

That is a meaningful difference for long term investors seeking less volatility investments in Australia while still capturing attractive growth opportunities.

Additional benefits include:

• shallower drawdowns during broad market selloffs
• lower manager crowding risk
• smoother returns driven by independent catalysts

In summary

The Datt Capital Small Companies Fund offers exposure to Australian small companies with a return stream that behaves independently of both the broader market and the typical small cap cohort. For investors looking for diversification, capital preservation and exposure to undervalued stocks Australia wide, this profile can meaningfully strengthen overall portfolio construction.

To learn more, visit datt.com.au or read more about the Fund’s investment philosophy, process and performance.