When we talk about Australian equities, the conversation often starts and ends with the big names.
The banks, miners and large industrial companies make up a significant part of the market and, understandably, receive a lot of attention from investors and analysts.
But there is another part of the market that can sometimes get overlooked: Australian small and mid-cap (SMID) companies.
For financial advisers, this part of the market can offer something different. There is a wider mix of sectors, more emerging businesses and, importantly, many companies that receive far less research coverage than their larger peers.
That can create opportunities for active managers prepared to do the work.
Finding what others might be missing
One of the attractions of the SMID market is simply the amount of ground there is to cover.
Many smaller companies have limited sell-side analyst coverage, and some receive very little attention at all. That means investors who are prepared to spend time understanding a business, meeting management and digging into the numbers can potentially uncover opportunities before they become widely recognised.
Of course, this works both ways.
Smaller companies can also be more volatile and company-specific risks can have a much bigger impact on returns. A poor investment decision can hurt a concentrated portfolio, which makes the quality of the research process particularly important.
For us, that means looking closely at the business itself — how it makes money, the quality of its management team, the strength of its balance sheet, its earnings outlook and, importantly, what we are paying for that growth.
The Infinity SMID Australian Equity Portfolio typically holds around 25 companies, with positions spread across different risk buckets. This allows the portfolio to remain concentrated enough for stock selection to matter, while still managing some of the risks that come with investing in smaller companies.
AI is creating opportunities beyond technology
AI is a good example of why it pays to look beyond the obvious names.
Most of the headlines have focused on the large US technology companies building AI models and chips. But the AI investment cycle is much bigger than that.
Someone still needs to build the data centres. Networks need to connect them. Power and infrastructure need to support them. And a range of commodities are required to build the physical infrastructure behind the technology.
That creates opportunities across the Australian SMID market.
Megaport, for example, provides data-centre connectivity, while Southern Cross Electrical has exposure to the infrastructure being built around data centres. There are also resource companies providing commodities that are important to data-centre construction and semiconductor manufacturing.
The important point is that investors don't necessarily need to pick the eventual winner in AI. There are opportunities further down the supply chain that can benefit from the investment cycle as it develops.
Resources remain an Australian strength
The same thinking applies to resources.
Australia has a genuine competitive advantage in resources, and the SMID market provides access to a much broader group of companies than the large diversified miners that dominate the ASX 200.
Gold and lithium are two areas where we continue to see interesting long-term opportunities, although the approach is selective. Rather than simply taking a view on where commodity prices are heading, the focus is on finding companies with quality assets, sensible balance sheets and attractive long-term earnings potential.
That distinction becomes particularly important when markets turn against a particular commodity.
PLS Group, for example, was one of the portfolio's largest detractors in June, falling 22.29% as lithium prices weakened. Despite the short-term pressure, the longer-term investment case remained supported by electrification and growing demand for battery storage.
This is one of the realities of investing in SMID companies: you have to be comfortable with periods of volatility and be willing to look beyond the share price.
Don't confuse a falling share price with a broken investment case
This has been particularly relevant through reporting season.
Share prices can move dramatically when companies report results, often because expectations going into the result are extremely high.
But a large move in the share price doesn't necessarily mean the underlying business has changed.
Life360 is a recent example. The company's share price fell sharply following its result, despite consensus earnings expectations being upgraded for both the near and longer term. The key question for the investment team was therefore not simply what happened to the share price, but whether the underlying investment thesis had changed.
That is an important distinction for long-term investors.
Sometimes a falling share price is telling you something important. Other times, it is simply the market reacting to short-term expectations.
Understanding the difference is where active management can add value.
So, where does SMID fit?
For advisers, the case for SMID equities isn't simply about adding more risk to a portfolio in the hope of generating higher returns.
It is about accessing a part of the Australian market that looks very different from the large-cap index.
There are more companies to choose from, more sectors represented and, in many cases, less research coverage. That can create opportunities but only for managers willing to put in the work and manage the risks that come with the territory.
The Infinity SMID Australian Equity Portfolio has now been investing in this space for 10 years. Its approach has remained focused on quality companies, fundamental research, disciplined portfolio construction and long-term earnings growth.
For investors with the right time horizon, that makes the SMID market worth a closer look.
Not because every small company will become the next big thing, but because some of the most interesting opportunities may be sitting outside the part of the market everyone is already watching.