Founder-Led Small Caps: Why They’re Still Australia’s Best Growth Opportunity

Yesterday at 4:03 pm

For years many investors have been told that buying an ETF is enough. Buy the market. Sit back. Wait.

It’s a simple strategy, but it’s unlikely to deliver the kind of returns needed to build meaningful long-term wealth.

If you want your portfolio to outperform, you need exposure to quality small-cap companies and particularly founder-led businesses.

At Under the Radar Report, some of our biggest winners over the years have shared one common characteristic: the people running the business were also major shareholders.

Why founder-led companies outperform

When founders still own a meaningful stake in their company, their interests are closely aligned with shareholders.

They’re not simply managing quarterly earnings.

They’re building long-term value.

That alignment often results in:

Better capital allocation
Stronger balance sheets
Long-term strategic thinking
Greater accountability
A genuine owner mentality

It isn’t surprising that many of Australia’s outstanding long-term performers began as founder-led businesses.

Some of our biggest winners

Subscribers recently enjoyed substantial gains from several founder-led companies.

Examples include:

Afterpay
Southern Cross Electrical (SXE)
GR Engineering (GNG)
Nick Scali (NCK)

At any given time, four or five founder-led businesses typically feature among our Best Buys because history shows that owner-operators often make better long-term capital allocators than hired executives.

Why blue chips face new challenges

Large companies still have an important role in a diversified portfolio. Many generate reliable dividends and benefit from powerful long-term themes.

However, investors should also recognise the challenges facing many of Australia’s largest listed companies.

Retailers, banks, industrials and healthcare companies remain heavily dependent on domestic economic growth.

That matters because Australia’s productivity has been deteriorating.

Recent OECD data paints a concerning picture, with Australia ranking near the bottom of developed economies for productivity growth over recent years. Weak productivity ultimately limits profit growth and makes it harder for mature businesses to justify premium valuations.

At the same time, years of strong ETF inflows have concentrated investor money into the largest companies, pushing valuations higher.

Where we’re finding value

Rather than simply holding everything, we continue to actively recycle capital.

Recently we’ve taken profits in Blue chips including AMP and Medibank Private after strong gains.

Which Blue Chips do we like right now?

At the same time, we’re continuing to favour quality income opportunities such as APA Group, which has delivered strong capital appreciation while still offering an attractive dividend yield.

On the small-cap side, we’ve also benefited from corporate activity.

OFX taken over

The recent takeover of our Small Cap stock and foreign exchange provider OFX delivered another significant gain for subscribers, highlighting one of the advantages of investing in quality smaller companies before the broader market recognises their value.

One founder-led company we’re watching closely

One business we’ve spent considerable time researching recently is Macquarie Technology (ASX: MAQ).

Like many of our strongest long-term performers, it’s founder-led, operates in attractive structural growth markets and continues to benefit from management with substantial skin in the game.

It’s exactly the type of business we believe can continue compounding shareholder wealth over many years.