With recent interest rate cuts and a critical housing shortage, microcap residential housing related stocks are starting to heat up, says Perpetual portfolio managers ALEX PATTEN and JAMES RUTLEDGE
- Microcaps starting to outperform blue chips
- Rate cuts, government investment ignites residential housing-linked stocks
- Find out about Perpetual Pure Microcap Fund
ASX microcaps are starting to outperform blue-chip stocks, with tailwinds driven by recent rate cuts and government commitments to more housing and infrastructure.
But the sector – Perpetual’s definition of micro caps is stocks with a market capitalisation or free float of <$300 million on acquisition – can be a challenging game.
While many microcap investors focus on the next big winner, Patten says the approach adopted by the Perpetual Pure Microcap Fund is more about anticipating the downside risk.
“We are only focused on buying profitable businesses that have got good balance sheets,” says Patten.
“So, when the market pulls back – given our focus on buying profitable businesses and businesses with good financial stability – historically this fund has materially outperformed.”
Up until this year, microcaps lagged the large caps – even more so than the small caps, but Patten notes that liquidity is returning to the smaller end of the market and the IPO pipeline is strong.
The top performers in the Perpetual Pure Microcap Fund have been construction materials firm Wagners Holding Co, residential housing provider Aspen Group and Motorcycle Holdings.
Valuation gap
However, there are other opportunities within the portfolio where the value is still to be realised, according to Patten.
“You've seen material outperformance of the small cap index relative to large cap, and even with that outperformance, the valuations of small caps relative to large is still looking very cheap.
Capral, one of the largest aluminium extruders in Australia with a roughly 30% market share, is witnessing cyclical tailwinds as building approvals start to rebound but are still well below government targets.
Patten says Capral trades at six times its earnings per share – which is considered undervalued, one times its net tangible assets and holds cash equal to about 30% of its market capitalisation.
“With interest rates having come down three times this year, we're starting to see approvals and commencements for new builds pick up, which is going to benefit a number of the stocks in the portfolio, including Capral,” says Patten.
Opportunities in defence
He highlights defence as another area experiencing some significant tailwinds given the strong focus by Western economies on increasing their defence spending.
The Perpetual Pure Microcap Fund has exposure to a business called Duratec, which is an infrastructure contractor for the Australian Defence Force.
“They have had a very strong relationship with defence for at least a decade now,” says Patten.
“They've done a lot of work on Garden Island, which is the naval base out of Perth, and there's a big pipeline of work that they're in the box seat to win from defence imminently over the next little while.”
While traditionally the Perpetual Pure Microcap Fund has been fully subscribed, the Fund – which currently sits at $130 million – has some available capacity.
“We do have some capacity at the moment and there isn't a lot of microcap funds out there that actually do have capacity,” says co-portfolio manager of the Fund James Rutledge.
“We do see capacity up to circa $200 million, so we think that there is an opportunity there in the near term for new investors given that capacity.”
Outperformed S&P/ASX Small Ordinaries
Since inception in September 2013 to 30 September 2025, the Fund has outperformed the S&P/ASX Small Ordinaries Accumulation Index by nearly 10%, with an overall return net of fees of 17.3% p.a*.
For the year to September 30, 2025, the fund has registered a net performance of 35.9% -- a 14.4% gain over the S&P/ASX Small Ordinaries Accumulation Index “The metrics of the fund at the moment (as at November 20,2025) are 11 times price to earnings, about a 4.5% dividend yield,” says Patten.
*Past performance is not indicative of future performance.
This information has been prepared by Perpetual Investment Management (PIML) ABN 18 000 866 535, AFSL 234426. It is general information only and is not intended to provide you with financial advice or take into account your objectives, financial situations or needs. You should consider whether the information is suitable for your circumstances and we recommend that you seek professional advice. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. The PDS for the Perpetual Pure Microcap Fund (Fund), issued by PIML, should be considered before deciding whether to acquire or hold units in the Fund. The PDS and Target Market Determination for the Fund can be obtained by calling 1800 022 033 or visiting our website www.perpetual.com.au.
All investing involves risk including the possible loss of principal. No company in the Perpetual Group (Perpetual Group means Perpetual ABN 86 000 430 827 and its subsidiaries) guarantees the performance of any fund or the return of an investor’s capital. Total return shown for the Perpetual's Funds have been calculated using exit prices after taking into account all of Perpetual’s ongoing fees and assuming reinvestment of distributions. No allowance has been made for taxation.
The information is believed to be accurate at the time of compilation and is provided in good faith. References to specific securities in this presentation are for illustrative purposes only and any views expressed in this presentation are opinions and do not constitute a recommendation to act.
About Perpetual’s Australian small and micro-cap equities team
Alex Patten and James Rutledge are co-portfolio managers of Perpetual Smaller Companies Fund and Perpetual Pure Microcap Fund.
Perpetual is a pioneer in Australian quality and value investing, with a heritage dating back to 1886.
We are one of Australia’s most respected and longstanding active investment managers, with a proven investment process that has been refined through more than 50 years of experience.
We have a track record of contributing value through “active ownership” and deep research.
Want to find out more? Contact a Perpetual account manager