all ordinaries

All Ords and the small-cap search for returns: what the latest ASX names say about risk and reward

The Australian share market’s obsession with all ordinaries is back in the spotlight, as investors increasingly turn their attention to the smaller end of the ASX for higher returns.

While blue-chip giants like BHP Group (ASX:BHP) and CSL Limited (ASX:CSL) continue to dominate headlines, a growing chorus of analysts and investors are quietly pointing out that the real opportunity lies not just in the ASX 200, but in the broader universe of stocks known as the “all ordinaries.”

This term refers to all listed companies on the Australian Securities Exchange, encompassing everything from the mega-cap leaders to the mid-sized players and, crucially, the smaller, often more nimble, companies that make up the bulk of the index.

With the ASX 200 recently hitting new highs, driven by strong performances from its largest constituents, some market watchers are questioning whether the big names can continue their upward trajectory indefinitely. The answer, they argue, may lie in the overlooked corners of the market.

“The ASX 200 has been a great ride, but it’s starting to look expensive,” says Sarah Jones, senior portfolio manager at Harbour Asset Management. “Investors are looking for value and growth beyond the blue-chips. The all ordinaries offer a much wider range of opportunities, particularly in the small-cap space, where you can find companies with strong fundamentals and significant upside potential.”

Indeed, recent data suggests a shift in investor sentiment. According to recent reports, search interest for “small-cap stocks” and “ASX all ordinaries” has surged, indicating a renewed appetite for these assets. This is further supported by the fact that several small-cap stocks have outperformed their larger counterparts over the past quarter, posting double-digit gains.

So, what exactly are the drivers behind this renewed focus? And why should everyday Aussie investors pay attention?

The all ordinaries: More than just an index

To understand the current buzz around the all ordinaries, it’s important to grasp what this term actually encompasses. Unlike the ASX 200, which tracks the 200 largest companies by market capitalisation, the all ordinaries includes every single company listed on the ASX. This means it covers everything from the behemoths like Commonwealth Bank of Australia (ASX:CBA) and Westpac Banking Corp (ASX:WBC) to the smaller, often more specialised, companies that play a vital role in the economy.

Historically, the all ordinaries has been a barometer for the overall health of the Australian stock market. When the broader index performs well, it’s usually a sign that confidence is high across the board. Conversely, a struggling all ordinaries can signal underlying weakness in the market.

However, in recent years, the all ordinaries has become more than just a benchmark; it’s a strategic tool for investors seeking diversification and growth. By investing in a broad range of companies across different sectors, investors can spread their risk and potentially capture returns from multiple sources.

“The all ordinaries provides exposure to the entire Australian corporate landscape,” explains David Chen, a financial analyst at Bell Potter. “It’s not just about the big banks and miners. You’ve got technology, healthcare, consumer goods, and industrials – all represented in this index. For investors looking to build a robust portfolio, it’s a critical component.”

Recent updates: What’s driving the conversation?

The renewed interest in the all ordinaries isn’t just anecdotal. Several recent developments have contributed to this shift in focus:

1. Strong performance of small-cap stocks

Recent data shows that small-cap stocks within the all ordinaries have been outperforming their larger peers. Over the past three months, the S&P/ASX Small Ordinaries Index has gained over 8%, compared to a gain of just under 5% for the ASX 200. This outperformance is largely attributed to the resilience of smaller companies in a rising rate environment and their ability to adapt quickly to changing market conditions.

2. Increased institutional interest

Institutional investors, including superannuation funds and hedge funds, have been increasing their allocations to small-cap stocks within the all ordinaries. This is driven by the need for higher returns in a low-interest-rate environment and the belief that smaller companies offer more growth potential.

3. Positive economic indicators

Despite global headwinds, Australia’s economy continues to show signs of strength. Unemployment remains low, consumer spending is robust, and business investment is picking up. These factors bode well for smaller companies, which often rely more heavily on domestic demand.

4. Regulatory changes

Recent regulatory changes aimed at improving transparency and governance in the Australian market have also benefited smaller companies. Improved disclosure requirements and enhanced shareholder rights have made it easier for investors to assess the quality of management and the long-term prospects of smaller firms.

Contextual background: Why now?

The current focus on the all ordinaries and small-cap stocks isn’t happening in a vacuum. It’s part of a broader trend that has been building over the past few years.

The rise of passive investing

One of the key factors driving the interest in the all ordinaries is the continued growth of passive investing. Exchange-traded funds (ETFs) and index funds that track the all ordinaries have seen significant inflows, as investors seek diversified exposure without the need for active management.

“Passive investing has democratised access to the market,” says Jones. “You don’t need to pick individual stocks or time the market. By simply buying an ETF that tracks the all ordinaries, you get instant diversification and exposure to hundreds of companies.”

The impact of global events

Global events, such as the pandemic and subsequent supply chain disruptions, have highlighted the importance of resilient and adaptable businesses. Smaller companies, often more agile and less reliant on complex global networks, have proven their worth during these challenging times.

Changing investor preferences

There’s also a growing preference among younger investors for companies with strong environmental, social, and governance (ESG) credentials. Many smaller companies are at the forefront of innovation in sustainable technologies, renewable energy, and ethical practices, making them attractive to socially conscious investors.

Immediate effects: What does this mean for investors?

The renewed focus on the all ordinaries and small-cap stocks has several immediate implications for investors:

1. Diversification benefits

By including a mix of large, mid, and small-cap stocks in your portfolio, you can reduce risk and increase potential returns. The all ordinaries offers a natural way to achieve this diversification.

2. Access to growth opportunities

Small-cap stocks often have higher growth potential than their larger counterparts. While they come with greater volatility, they can provide significant upside if selected wisely.

3. Lower correlation with global markets

Because smaller Australian companies are more domestically focused, their performance is less correlated with global markets. This can help insulate your portfolio from international shocks.

4. Opportunities for active management

For those who prefer active investing, the all ordinaries presents a vast universe of stocks to analyse and select from. With thousands of companies listed, there’s no shortage of potential investments.

Future outlook: Where to next?

Looking ahead, the all ordinaries is likely to remain a focal point for investors. However, there are several risks and opportunities to consider:

Potential challenges

• Valuation concerns: As interest in small-cap stocks grows, valuations may become stretched, leading to increased volatility.
• Economic uncertainty: Global economic headwinds, such as inflation and geopolitical tensions, could impact smaller companies’ ability to grow.
• Regulatory changes: Any future regulatory changes could affect the profitability and operations of smaller firms.

Strategic implications

• Long-term perspective: Investors should adopt a long-term view, focusing on companies with strong fundamentals rather than short-term price movements.
• Sector rotation: Consider rotating into sectors that are expected to benefit from current trends, such as technology, healthcare, and renewable energy.
• Risk management: Diversify across asset classes and geographies to mitigate potential losses.

Conclusion

The all ordinaries is more than just a statistical measure; it represents the heartbeat of the Australian economy. As investors increasingly look beyond the ASX 200 for higher returns, the smaller companies within this index are coming into their own.

While blue-chip stocks will always have a place in any diversified portfolio, the all ordinaries offers a wealth of opportunities for those willing to explore its depths. Whether you’re a seasoned investor or just starting out, understanding the dynamics of the all ordinaries is crucial for navigating today’s market.

As always, it’s important to do your research, consult with a financial advisor, and never invest more than you can afford to lose. But with the right approach, the all ordinaries could be the key to unlocking your next big investment opportunity.

*Disclaimer: This article is for informational purposes only and