Why should we bother with Small Cap investing?
The shift in equity allocations away from domestic markets to more global mandates has tended to result in an increase in the weighted average market cap of investors’ portfolios. This shift has meant that Small Caps have become an overlooked asset class.
Small Cap stocks tend to outperform in a rising market where the economy is improving. Policy makers suggest that this is where we are today. Clients could easily make a case for allocating some capital to Small Cap stocks.
Markets are focusing on yield and stable earnings. Small Caps don’t fit into these categories. The contrarian argument suggests that they may well outperform the market. Furthermore, the rise of smart beta may lead to an increase in weighting to Small Cap stocks as many of the alpha themes play on the fact that Small Caps outperform over the long term.
Institutional investors (outside the US) have not yet allocated significant capital to Small Cap stocks. Managers are likely to be flexible and keen for your business. This could be an opportune time to negotiate with high quality managers in this space.
Perhaps the most significant stumbling block we see for clients investing is the belief that regional specialists should do better than a global mandate in this space. This would therefore require a number of managers and thus eat into too much of a clients time in monitoring for a small amount of their assets.