As the risk of recession looms over Australia’s economic outlook, Sky News business reporter Edward Boyd looks back to the 90s as well as forward to the latest data that is tipping the pendulum right now.

Portfolio managers Phillip Hudak and Matt Griffin joined Maple-Brown Abbott last year to kick off the investment house’s small companies coverage. Their $500m fund, which invests in ASX-listed companies below the top 100, has enjoyed a 20.1 per cent return over the 11 months to May. This compares to the benchmark of 6.5 per cent, according to Mr Hudak.

The fund – and a similar one he and Mr Griffin ran at AMP – showed the opportunities in the small cap space, Mr Hudak said.

He said the strategy wasn’t predicated on thematics in the small cap space, but rather targeting cash-generating opportunities and steering away from companies exposed to the looming economic slowdown.

Market watchers are now warning of an economic pinch point in the latter half of the year as consumer spending is crimped by 12 rate rises by the Reserve Bank, which has taken the cash rate from 0.1 per cent in April last year to 4.1 per cent in May.

“The expectation is the market environment could be a lot more challenging,” Mr Hudak said.

This has seen the Maple-Brown Abbott portfolio steer clear of the smaller non-bank and bank lenders, as well as retail stocks exposed to future consumer spending.

The fund run by Mr Hudak and Mr Griffin holds stakes in around 40 companies, but they says they could dial this up or down by 10 or so holdings.

They said they were not averse to maintaining holdings in a business if it were to reach the ASX 100, but noted they would probably cycle that stake within 18 months to reinvest in the small and medium parts of the market.

Mr Hudak said the market was already pricing in a downturn, which had seen a “material drawdown in the small caps performance versus the large caps”.

He said this was reducing liquidity around the small caps.

“You are starting to see valuation upside of small caps versus large caps coming through there,’ he said. “If you look at the small ordinaries it’s trading below its long term discount.”

Mr Griffin, who also runs the small and medium cap portfolio, said the sector had underperformed the top 100 stocks by almost 15 per cent over the past 18 months. But he said this was “not unusual” given the market was expecting “a potential recession or economic slowdown’.

Mr Griffin said small operators were much better positioned going into the market downturn than they were the last time Australian equities faced a correction.

He said small operators had piled up cash and the Australian market was much less weighted to oil and gas and biotech operators than during the 2008 crash.

“We can avoid areas where there’s earnings downgrades coming through,” he said.

“We’re coming into this period where about half the stocks in our fund have net cash balance sheets. If there is any economic weakness it allow those companies to pursue mergers and acquisitions and do buybacks.”

As the risk of recession looms over Australia’s economic outlook, Sky News business reporter Edward Boyd looks back to the 90s as well as forward to the latest data that is tipping the pendulum right now.

Portfolio managers Phillip Hudak and Matt Griffin joined Maple-Brown Abbott last year to kick off the investment house’s small companies coverage. Their $500m fund, which invests in ASX-listed companies below the top 100, has enjoyed a 20.1 per cent return over the 11 months to May. This compares to the benchmark of 6.5 per cent, according to Mr Hudak.

The fund – and a similar one he and Mr Griffin ran at AMP – showed the opportunities in the small cap space, Mr Hudak said.

He said the strategy wasn’t predicated on thematics in the small cap space, but rather targeting cash-generating opportunities and steering away from companies exposed to the looming economic slowdown.

Market watchers are now warning of an economic pinch point in the latter half of the year as consumer spending is crimped by 12 rate rises by the Reserve Bank, which has taken the cash rate from 0.1 per cent in April last year to 4.1 per cent in May.

“The expectation is the market environment could be a lot more challenging,” Mr Hudak said.

This has seen the Maple-Brown Abbott portfolio steer clear of the smaller non-bank and bank lenders, as well as retail stocks exposed to future consumer spending.

The fund run by Mr Hudak and Mr Griffin holds stakes in around 40 companies, but they says they could dial this up or down by 10 or so holdings.

They said they were not averse to maintaining holdings in a business if it were to reach the ASX 100, but noted they would probably cycle that stake within 18 months to reinvest in the small and medium parts of the market.

Mr Hudak said the market was already pricing in a downturn, which had seen a “material drawdown in the small caps performance versus the large caps”.

He said this was reducing liquidity around the small caps.

“You are starting to see valuation upside of small caps versus large caps coming through there,’ he said. “If you look at the small ordinaries it’s trading below its long term discount.”

Mr Griffin, who also runs the small and medium cap portfolio, said the sector had underperformed the top 100 stocks by almost 15 per cent over the past 18 months. But he said this was “not unusual” given the market was expecting “a potential recession or economic slowdown’.

Mr Griffin said small operators were much better positioned going into the market downturn than they were the last time Australian equities faced a correction.

He said small operators had piled up cash and the Australian market was much less weighted to oil and gas and biotech operators than during the 2008 crash.

“We can avoid areas where there’s earnings downgrades coming through,” he said.

“We’re coming into this period where about half the stocks in our fund have net cash balance sheets. If there is any economic weakness it allow those companies to pursue mergers and acquisitions and do buybacks.”