FY26 in review: what the small caps reset means from here

FY26 was a testing year for active small cap managers. Here’s what actually drove it, and why the setup from here looks more interesting.

William Hanna, Investment Analyst – Maple-Brown Abbott Australian Small Companies Fund, looks beneath the index: industrials down 4% while resources rose 30%, the unwind of the crowded tech and gold trades, and a gold universe that’s drastically changed. Will also explains why the small caps derate over the last 12 months is the kind of discomfort that has historically preceded stronger forward returns – and why the team isn’t sitting around waiting on the RBA.

Transcript

Hello, I’m Dean McLelland, Investment Director at Antipodes, and I’m joined today by Will Hanna, Investment Analyst with the Maple-Brown Abbott Australian Small Companies team. Welcome, Will. Thanks, Dean.

FY26 – the year macro took over

With the financial year to June 2026 behind us now, it’s hard to think of another year, perhaps outside of COVID where markets have been so dominated by the macro. We had rates up, down, up. We had the gold price soaring and then tumbling, and we had the tech sector go from hot to hated. How would you sum up the financial year?

FY26 was a tough year, Dean. I think the vast majority of small cap managers underperformed. The small caps index performed in the top quartile relative to the rest of the active managers. This is primarily because small cap managers are over-indexed to the growth trade, technology and software, they’re underweight resources, and they’re not as diversified. The small cap resources index was up 30% over the year, relative to the small cap industrial index, which was down 4%.

Tech, gold and defence – broken or overpriced?

So if we look back a little bit further, financial year 24 and financial year 25 were really dominated by technology, gold and defence. Then in financial year 26, as we said, you’ve seen technology go from hot to hated, and you’ve seen the gold miners halve their exposure within the small cap index. So with the underlying businesses, do you think there’s an element of them having fundamentally broken, or are they just overpriced?

I think for a lot of these businesses they were overpriced relative to their history. I think the market expectations for a lot of these businesses, whether it might be the tech companies, or gold, especially with the expectations of what the gold price would be in the forward years, were rather extended. For some of these companies we’ve seen them miss earnings expectations, so you’ve had earnings downgrades that really didn’t justify the valuations that were assigned to a lot of those companies.

But ultimately these businesses are not fundamentally broken. We’ve seen, once that downgrade cycle plays out, some of them have come back and done well. This might be a Life360, for example, where you had monthly active user (MAU) downgrades come through, and then ultimately, now with their entry into Brazil and Mexico and the growth in advertising, that business has continued to show good momentum right after a substantial de-rate.

Ultimately we’ve seen other companies where you’ve had de-rates but not necessarily downgrades, like Bravura in our portfolio, and the cost story continues to remain there. So these businesses aren’t broken. The market suspects that the longevity of these businesses is certainly in question, but fundamentally, market expectations were extended.

How much rests on the RBA

So the market’s now putting a 50% probability on one more rate hike before rates start coming down. How much of the case for investing in small caps hinges on the RBA turning?

I think small caps is a broad, diversified space of the market. Some of these companies do rely on the cost of capital coming down. Ultimately, when you look at it, especially through the small cap index history, rate cuts do matter. Rate hikes are often the catalyst for multiple contractions.

Right now, you’ve got valuation support for the small cap index, trading on 15 times price-to-earnings. It troughs usually at 14 times. Historically, it’s traded on 18 times. So in order to get that multiple re-rate, you do need rate hikes to peak and then, hopefully, the silver lining of rate cuts, at this point in time, that usually is the opportunity to get into small caps. Once that rate hike cycle has played out, that’s usually the turning point not only for earnings across the index, but for the multiple, and that’s where you’re really making your money.

Stories that override the macro

That’s a really interesting point, that the underlying businesses in the portfolio aren’t reliant on rates coming down. Can you give me an example of one business where the investment case is pretty agnostic to the macro?

I think there’s a number of those in the small cap index, and it’s our job, putting a portfolio of 40 stocks together, to find those stocks. So whether you’re in a rate hike or a rate reduction, whether price-to-earnings multiples are moving around, whether you’ve got war offshore, these businesses are rather insulated.

Megaport, for example. We were in the stock quite a while ago. This is a business that’s riding hot on that AI thematic, run by a great CEO in Michael Reid, who’s winning a lot of contracts for the significant demand for CPU as a service, GPU as a service, and that entire cluster in terms of the shift from training workloads to inferencing and agentic workloads. So they’re a big beneficiary there. Regardless of what happens, they’ll continue to roll in those contracts, and we think that they will. We’ve already seen three announcements, and that’s got the market excited. We think that story will continue to play out, not only for that latitude business, but we will see the core networking business benefit from that as well.

Another example is SNL, Supply Network Limited. It’s a boring aftermarket bus and truck parts business, largely countercyclical. A lot of the revenue growth is driven by taking market share from their lacklustre competitors. We’re seeing good operating leverage in that business as well. They should continue to grow earnings at mid double digits for the years to come. It’s a founder-led business, run by a great management team. So these are the sort of stories, or small caps, that we’ve got conviction in that remain in the top holdings of our Fund, and will fundamentally perform well regardless of what happens to the macro environment.

Thanks very much for your insights today, Will. Really appreciate it, and wish you and the Australian Small Companies team all the best for the financial year ahead.

Please do reach out if you’d like to hear more about the Maple-Brown Abbott Australian Small Companies Fund or the other Maple-Brown Abbott funds. We look forward to speaking with you.

Disclaimer
This information is prepared by Antipodes Partners Limited (“Antipodes”) (ABN 29 602 042 035, AFSL 481 580) as the Investment Manager of the Maple-Brown Abbott Australian Small Companies Fund (ARSN 658 552 688) (‘the Fund’). Maple-Brown Abbott Limited (‘MBAL’) (ABN 73 001 208 564, AFSL 237296), is the Responsible Entity of the Fund. MBAL and Antipodes are subsidiaries of Antipodes Partners Holding Limited (ABN 91 602 828 526). The Product Disclosure Statement (‘PDS’) and Target Market Determination (‘TMD’) of the relevant Fund are available via the links below. Any potential investor should consider the PDS and TMD before deciding whether to acquire, or continue to hold units in, the Fund.

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