Earlier this year, Director of Manager Research Eva Cook published her thoughts on 5 reasons why small caps may shine bright in 2025. She believes that the conditions in 2025 position small cap stocks to potentially add significant value to investors’ portfolios.

The first reason focuses on the likely trajectory of interest rates in 2025 and the impact on small cap companies. Small cap companies often have a capital structure that is more sensitive to short-term interest-rate movements. After central banks cut rates, the debt servicing costs for these companies become less burdensome, potentially leading to better performance within the small cap segment.

Figure: Domestic interest rates (%) vs Australian small cap market returns, source: Morningstar

The report leans on insights from co-portfolio managers of the Maple-Brown Abbott Australian Small Fund. Phillip Hudak and Matt Griffin say, ‘Historically, interest-rate cuts have resulted in subsequent positive performance at the smaller end of the domestic equity market. Last year, the RBA was uncoordinated with other central banks, remaining more hawkish, given stickier domestic inflation, although have recently recast a more dovish tone with interest-rate cuts expected to commence in the first half of the 2025 calendar year with the market factoring in close to 0.75% reduction by year-end. This setup is expected to be supportive and renew investor interest for Australian small caps.’

A gold medalist option for investors

Hyperion Small Growth Companies stands out as a top-tier domestic small-cap growth strategy, driven by a highly experienced investment team and a disciplined, long-term approach that has consistently delivered strong results. However, due to the team’s success in identifying small-cap companies that evolve into large-cap leaders, the portfolio carries a notable large-cap bias. Prospective investors should carefully consider this potential overlap with existing large-cap exposure before committing capital.

Leading Hyperion’s investment team is Chief Investment Officer Mark Arnold, a key figure since 1996 and the driving force behind the firm’s distinct long-term growth philosophy. He is joined by Deputy CIO Jason Orthman, who came on board in 2008, forming a seasoned leadership duo that has steered Hyperion through multiple market cycles with discipline and clarity. Their deep research expertise and thought leadership have earned recognition from Morningstar, reinforcing the firm’s reputation for consistency and conviction. Hyperion’s steady team expansion, coupled with a low-turnover culture, reflects its unwavering commitment to investment integrity and operational resilience.

Hyperion’s investment process stands out for its disciplined, long-term focus on identifying high-quality growth companies with durable competitive advantages that can strengthen over time. At its core is a rigorous bottom-up research framework, supported by detailed financial modeling and a strict 10-year investment horizon. The resulting portfolio—typically comprising 15 to 30 stocks—is highly concentrated, deeply growth-oriented, and structurally distinct from both the benchmark and peers, often appearing expensive on short-term valuation metrics. Sector skews are pronounced, with no exposure to mining or energy, reflecting the team’s preference for predictable earnings and pricing power. While the strategy may lag during cyclical value rotations, Hyperion’s commitment to its long-term philosophy has ensured resilience.

Over the three-, five-, and 10-year periods to Aug. 31, 2025, the strategy has delivered strong outperformance against both the index and its peer group.

Hyperion small growth companies performance

Figure: Hyperion Small Growth Companies Fund performance against index and category benchmarks. AUD | YTD Investment as of Aug 31, 2025 | Category: Equity Australia Mid/Small Growth as of Aug 31, 2025 | Index: S&P/ASX Small Ordinaries TR AUD as of Aug 31, 2025

The fund earns a Gold medalist rating from our analysts. A Gold Medalist Rating from Morningstar indicates a fund is expected to outperform its peers and benchmark over the long term (at least five years), with top-tier performance based on a qualitative assessment of its People, Parent firm, and Process.

For actively managed funds such as Hyperion’s Small Growth Companies Fund, this means they are anticipated to generate positive alpha (excess returns) after fees, while for passive strategies, it signifies an expectation of alpha exceeding the category median or zero.

Key facts

Strategy: The Fund invests primarily in Australian listed companies excluded from the S&P/ASX 100 Index, but will also have some exposure to cash.

Minimum initial investment: $20,000

Total Cost Ratio (prospective): 1.74%

Distribution frequency: Quarterly

Should you invest in small caps?

Not sure if small caps are for you? Simonelle Mody has written an article on the risks investors need to consider and when small caps deserve a place in investors’ portfolios.

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