Australian Smaller Companies: Fallen Angels, and Zombies and Glamours....oh my!
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
Are companies that were previously too large for small cap indices but have fallen from grace and now reside in small cap indices.
Zombies
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
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.
Important Information
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This document has been prepared only for those persons to whom Invesco has provided it. It should not be relied upon by anyone else. Information contained in this document may not have been prepared or tailored for an Australian audience and does not constitute an offer of a financial product in Australia. You may only reproduce, circulate and use this document (or any part of it) with the consent of Invesco.
The information in this document has been prepared without taking into account any investor’s investment objectives, financial situation or particular needs. Before acting on the information the investor should consider its appropriateness having regard to their investment objectives, financial situation and needs.
You should note that this information:
- may contain references to dollar amounts which are not Australian dollars;
- may contain financial information which is not prepared in accordance with Australian law or practices;
- may not address risks associated with investment in foreign currency denominated investments; and
- does not address Australian tax issues.
Issued in Australia by Invesco Australia Limited (ABN 48 001 693 232), Level 26, 333 Collins Street, Melbourne, Victoria, 3000, Australia which holds an Australian Financial Services Licence number 239916.
- may contain references to dollar amounts which are not Australian dollars;
