Why Investors Are Turning Back to Australia’s Emerging Companies

The Re-Emergence of Small Caps

After several years of underperformance, Australia’s small-cap sector is showing renewed strength. The S&P/ASX Small Ordinaries Index has risen around 24% year-to-date, outperforming the ASX 200 by more than 14%. This sharp rebound signals what Datt Capital’s CIO, Emanuel Datt, describes as the beginning of a multi-year catch-up phase.

He notes that the valuation gap between small and large caps remains substantial, and that “investors are now starting to price in that differential.” With structural shifts such as offshoring, resource security, and AI adoption reshaping industries, smaller companies are again being recognised for their agility and growth potential.

Watch the full interview with Emanuel Datt on Ausbiz below, or continue reading the blog for key insights.

Interest Rates and Investor Sentiment

While much attention has centred on the Reserve Bank of Australia’s next move, Emanuel argues that small-cap momentum isn’t solely dependent on rate cuts.

“A stable interest rate environment will be beneficial for small caps irrespective,” he says.

With inflation moderating and economic data suggesting resilience, the probability of a sharp rise in rates appears low. This stability supports risk appetite for small-cap exposure, where companies can reinvest earnings at higher returns than mature large-caps.

Inside the Datt Small Companies Fund

The Datt Small Companies Fund has been designed for precisely this environment. Since inception, it has achieved over 40% per annum (net to investors) by focusing on high-conviction, research-led positions outside the ASX 100.

The fund’s portfolio is sector-agnostic and typically holds 15–25 positions, reflecting a bottom-up approach that emphasises quality, valuation, and catalysts for re-rating. Much of the fund’s recent outperformance has been attributed to disciplined stock selection in the resources and technology sectors.

“We do all our own primary research, building independent conviction before the market does,” Emanuel says. “Our alignment with investors ensures we share the same outcomes.”

Disclaimer: The information and data presented are for educational and illustrative purposes only. They do not constitute investment advice or a recommendation to buy or sell any financial product. Past performance is not a reliable indicator of future performance.

Key Contributors and Focus Areas

Within resources, Datt Capital’s holdings include Meeka Metals, an emerging gold producer that has recently commenced production, alongside Genesis Minerals and Prometheus, both well-established gold producers.

These positions have benefited from sustained strength in gold prices and precious metals, as investors seek defensive exposure amid geopolitical uncertainty.

Outside of resources, technology remains a core pillar of the fund.

“The question is who benefits most from AI adoption,” Emanuel explains. “We see long-term efficiency gains for select technology firms through automation and cost reduction.”

This balanced exposure to cyclical and structural growth themes underpins the fund’s resilience across market cycles.

Why It Matters for Investors

Small caps tend to lead early in market recoveries, driven by earnings growth, M&A activity, and capital reallocation. Yet the segment remains under-owned after years of relative weakness. For long-term investors, the current period may represent a rare opportunity to capture early-stage value before broader market recognition.

At Datt Capital, independent research and alignment with investors are central to this process. The team continues to focus on high-quality companies positioned to benefit from Australia’s next growth cycle, balancing capital preservation with compounding potential. If you want to learn more about our Datt Small Companies Fund and how it targets undervalued Australian businesses positioned for long-term growth, view our Fund page or contact our Head of Distribution, Daniel Liptak, at daniel@datt.com.au or 0419 004 524.

FAQs: Australian Small-Cap Investing and the Datt Small Companies Fund

What is the Datt Small Companies Fund?

The Datt Small Companies Fund is a managed investment fund focused on identifying undervalued Australian small-cap stocks outside the ASX 100. It aims to deliver consistent, high-return investment outcomes through disciplined research, independent thinking, and active portfolio management.

Why are Australian small-cap stocks performing strongly?

After several years of underperformance, ASX small caps have begun a multi-year recovery phase, supported by stable interest rates, sector rotation, and renewed investor appetite for growth. Smaller companies are benefiting from structural trends such as offshoring, resource security, and technology adoption.

How does Datt Capital invest in small companies?

Datt Capital follows a bottom-up, research-led approach. The fund typically holds 15–25 high-conviction positions in Australian small companies that demonstrate strong fundamentals, attractive valuations, and clear catalysts for long-term growth.

Is the Datt Small Companies Fund considered a high-risk investment?

While small-cap funds can be more volatile than large-cap portfolios, Datt Capital’s process focuses on low-risk investments through rigorous due diligence, portfolio concentration, and active risk management to preserve capital over the long term.

How does this fund differ from other investment companies in Australia?

Datt Capital is a fully independent fund manager in Melbourne, with its principals investing alongside clients. This alignment ensures accountability and a shared focus on delivering sustainable returns through original research and prudent portfolio construction.

Can the Datt Small Companies Fund complement an Absolute Return strategy?

Yes. Many investors hold the Datt Absolute Return Fund alongside the Small Companies Fund for diversification. While the Small Companies Fund seeks capital growth through equities, the Absolute Return Fund aims to deliver positive returns across market cycles, helping balance risk and opportunity.

Who should consider investing in the Datt Small Companies Fund?

The fund is designed for investors seeking exposure to Australian small companies and looking to build long-term wealth through disciplined, research-based investing. It suits those comfortable with some volatility in pursuit of higher returns.