Insight

Australian Smaller Companies: Fallen Angels, and Zombies and Glamours....oh my!

14 August 2024
Scott Bennett
Scott Bennett
Director, Factor Investing & Multi-Asset Strategies
Wizards of Oz

Active Australian smaller companies managers have consistently delivered impressive returns, a feat that has earned them the nickname "Wizards of Oz". In addition to the active returns being high, so have been the fees charged. 

Our latest Invesco Australian Equities whitepaper discusses the potential for active management within the Australian smaller companies sector, highlighting that smaller companies often offer higher growth opportunities compared to their larger counterparts. However, simply investing in a small-cap index may not yield optimal results due to the inherent structural issues. 

The paper identifies the following three key types of companies within small-cap indices that typically underperform and should be avoided. 

Fallen Angels, Zombies and Glamours
Fallen Angels
1

Are companies that were previously too large for small cap indices but have fallen from grace and now reside in small cap indices.

Zombies
2

Are companies that are unable, or barely able, to cover their operating and interest expenses. These companies typically have high levels of debt and low levels of profitability. 

Glamours
3

Are companies that are trading on extremely high valuations with the expectation that future earnings significantly exceed current or historical earnings.

The paper suggests that focusing on proven return drivers such as Momentum, Quality, and Value (MQV), can significantly enhance returns in the Australian smaller companies space. At Invesco we take a refreshing approach to investing in Australian smaller companies to sidestep these pitfalls and achieve superior returns. Our systematic strategy combines the MQV factors to deliver exceptional performance without the high fees typically associated with active managers.

Download the paper

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