Investors in small cap stocks are watching potential interest rate movements in the short-term, but a bigger picture opportunity is being found in value due to the attractive prices for many quality smaller companies, according to an expert in small and micro-cap stock investing.
A shift toward small cap stocks occurred during 2025, yet signs of value remain for those prepared to look actively, according to Mike Younger, Portfolio Manager for the Prime Value Emerging Opportunities Fund and Prime Value Microcap Fund. “We have seen a swift rotation in recent months from investors chasing growth at any price, to chasing more value-oriented names.
“There looks to be good buying opportunities among diverse, quality small cap stocks.
“Small cap profit growth has delivered such that the forward valuation multiple is not as stretched as some might perceive, with the Small Ordinaries index at c16x FY27 P/E.
“The question is whether this continues, particularly with the direction of interest rates being in flux.”
An upwards interest rate move might take the gloss off recent small cap momentum, Younger said, though he still expects to find investment opportunities regardless of any rate hikes. “Rates don’t change the portfolio make-up too much for us. We continue focusing on companies that we see generating a minimum 10% IRR every year, and smaller companies provide greater opportunities to find these gems.
“There are currently opportunities to find higher quality industrial businesses that are growing earnings per share at more than 10 per cent per annum with share prices that are underperforming as investors chase resource stocks.”
Potential for volatility during 2026 could play into an active manager’s hands, Younger said. “Volatility can be an active manager’s best friend, providing dislocations between share prices and the underlying value of a company.
“For example, volatility in 2025 allowed us to add quality telco, TPG Telecom, to the fund, as well as trading around our position in Regis Healthcare.”
Younger said consistency is often underrated in small caps, with smaller company portfolios showing great resilience across various cycles. “There’s a misconception that smaller stocks can be ‘boom-bust’, but with careful portfolio construction it’s possible to deliver consistently across cycles.”
The small cap Prime Value Emerging Opportunities Fund has itself been a picture of consistency, having delivered 11.3% per annum net of fees to investors since inception in October 2015 to 31 December 2025.
The Fund is rated Highly Recommended by Zenith, Recommended by Lonsec, and is available on Netwealth, uXchange, Mason Stevens, Hub24, BT Panorama, Praemium, IconiQ and AMP North.
Source: [AdviserVoice]