Australia’s small-cap managers are confronting a significant reckoning this year, marked by a challenging period of poor returns, leading to a substantial exodus of investor funds and a wave of fund closures across the sector. Persistent inflation, escalating interest rates, and a housing downturn have particularly impacted the smaller end of the sharemarket, which is highly susceptible to economic growth fluctuations. The S&P/ASX Small Ordinaries Index has tumbled 16 per cent this year, reflecting this hardship.
This dire environment has already seen at least 12 small-cap funds shut down this year, a sharp increase from eight terminated in 2025, according to Morningstar. Among these was Tura Capital, launched by Australian equities manager DNR Capital, whose global small- and mid-cap strategy was deemed no longer economically viable. Boutique manager Prime Value Asset Management wound up its Opportunities Fund after a strategic review, and Magellan Investment Partners terminated Airlie Funds Management’s $30.7 million Small Companies Fund due to insufficient scale. Regal Partners recorded significant declines, with its Australian Small Companies Fund down 16.3 per cent and its Global Small Companies Fund dropping 18.4 per cent in the year to September 30.
The sell-off intensified with bond traders increasing bets on the Reserve Bank of Australia lifting the cash rate above 5 per cent by early next year. Many remaining small-cap funds are seeing investors face double-digit losses, with Hyperion’s Small Growth Companies strategy plunging 35.8 per cent and QVG Capital’s Opportunities Fund declining 26.9 per cent. Despite widespread underperformance, some managers remain hopeful for a long-awaited rotation from expensive blue chips into undervalued small-caps once interest rates ease. Datt Capital noted many small companies are now attractive takeover targets for offshore bidders, a trend already seen with foreign takeovers of ASX-listed companies more than tripling this year, and suggests this activity reflects a considered view of company valuations.
