Four small caps this top fundie says are worth a look

Ophir Asset Management’s Aussie small cap fund returned 39 per cent last financial year. Here’s where they’re investing this year.

Andrew Mitchell & Steven Ng, co-founders of Ophir Asset Management. Picture: Hollie Adams/The Australian

The nation’s biggest companies dominated investor attention last financial year, just look at CBA and its 50 per cent share price rise.

This year however could be shaping up as the time for smaller companies to shine.

That’s the view of Ophir Asset Management’s Andrew Mitchell, who says looming rate cuts and increasing confidence in the broader economic outlook are helping to push more investor money into small caps.

It’s a case of a rising tide lifts all boats, Mitchell tells The Australian.

“What we’re seeing, in terms of the market at the moment, is broader participation in the rally. That’s really encouraging for investors,” he says.

“When more and more companies participate in the rally, it’s a very good sign that there’s confidence and fund managers are deploying more cash. And this is happening globally as well as Australia.”

For fiscal 2025, Ophir’s Aussie small cap fund, the Ophir Opportunities Fund, returned 39 per cent and ranked as the top-performing Australian share fund, according to Morningstar.

In a stellar year for the outperformers, Ophir bested peer Forager, whose Australian share fund returned 31 per cent, and Ausbil’s Australian Small Cap fund, which saw returns of 28.6 per cent.

Since inception in 2012, Ophir’s strategy has returned 23 per cent net of fees per annum.

Outsized positions in companies such as Life360, Generation Development Group and Service Stream helped put the fund in first place.

Life360, the tracking app loved by parents of teenagers, is still on Mitchell’s list of stocks that should rise this year. That’s despite its share price rocketing 125 per cent since April.

But Ophir is trying to “broaden out” its holdings as the market rally brings in previously unloved stocks. It’s a challenge in some ways, Mitchell says.

“We’re very good at picking companies that are doing better than the market thinks. But at the moment, companies that are starting to rally are not necessarily companies that are doing well.

“Now the market’s looking forward 18 months, and it’s saying they’re going to do well in 18 months time. So that does make it harder for us.”

It might make it harder for Ophir to outperform, but a broader rally is a good outcome for investors more generally. That’s if the economic scenario plays out as we expect.

Small caps are riskier

On the other hand, if inflation is persistent and interest rates don’t come down, money could just as quickly flow out of small caps, which are seen as the more volatile and riskier end of the market.

“We need to see rates come down. We need to see a rate cut from the Reserve Bank on the 12th of August,” Mitchell says.

“We want to see this Goldilocks situation where the economy is just cruising nicely, allowing the Reserve Bank to cut rates and maybe stimulate the economy at a time when cost of living is quite high.”

The Reserve Bank shocked the market by keeping rates on hold at 3.85 per cent at its July meeting.

In the RBA minutes released this week, the central bank’s decision took in the resilient jobs market and a stubborn inflation outlook.

Since February, the RBA has cut the cash rate by 50 basis points but has signalled a cautious approach to further easing.

So, with that in mind, what other companies does Mitchell see pushing higher in the year ahead?

Retailer Adairs is on the list. It’s a company Ophir holds a small position in and Mitchell thinks retail will get a nice bump from rate cuts.

Also on the list is mining services companies NRW and Macmahon Holdings.

“McMahon is set to generate a lot of cash; They’ve really flipped the business model, and they’re doing civils, which is very cash generative,” Mitchell says.

“So they’re generating more cash out of their mining business, which is a lot more capital intensive, and it hasn’t participated in the rally yet.”