Over the past year, small to medium capitalised stocks on the ASX have outperformed their larger brethren substantially.
The S&P/ASX Small Ordinaries (Index: ^AXSO) (ASX: XSO) is up 16%, while the S&P/ASX 20 (ASX: XTL) us up just 1.6%. The Small Ordinaries tracks the performance of the top 101 to 300 stocks in the ASX 300 index, so excludes the Top 100 stocks.
The Top 100 index is up 6.3% in the past 12 months, but most of that performance has been driven by the smaller end of the index, as the large-cap blue chips have weighed on the returns.
But that outperformance may be coming to an end with one well-known listed investment manager, Australian Foundation Investment Co.Ltd. (ASX: AFI) suggesting the big end of the market is about to turn the tables on its smaller rivals, and outperform them over the next 12 months.
Portfolio manager Ross Barker manages $6.5 billion at AFIC, and while he still sees some headwinds for many of the top 50 stocks, he's bullish on the big miners BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO). Mr Barker says he expects them to be prime candidates for lifting dividends higher in the next few years, thanks to efficiency improvements, cost cutting and a recovery in commodity prices.
AFIC owns more than $300 million worth of shares in BHP, and it's the listed investment company's third-largest holding behind Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC). The company also holds close to $190 million worth of Rio's shares.
All four banks have significant positions in AFIC's portfolio, but Mr Barker says while they may struggle to maintain or even increase dividends, they could still use cost-cutting to drive an increase in earnings.
Mr Barker also pointed out that infrastructure stocks Transurban Group (ASX: TCL) and Sydney Airport Holdings Ltd (ASX: SYD) were both expensive at current prices – and they will both see their share prices hit when interest rates eventually go back up – something we've have warned about previously.
