Why would you invest in Smalls and Micro Cap stocks?
Diversification and risk / return purposes are the main reasons why investors seek exposure to small and microcaps stocks. Many investors have a good exposure to the large caps stocks such as the big banks and BHP and RIO. However, these same investors have little or no exposure to Small and Microcaps stocks.
Small and microcaps stocks may be higher risk than many larger cap stocks, as they are just that, small; and as such are generally earlier in their business cycle. However smaller companies grow into bigger companies and as such the capital return when investing in these stocks can be greater – commensurate with the risk associated.
- When do Small and Micro caps do well? When do Small and Micro caps outperform large caps and why?
Small and Microcap stocks can outperform and underperform large cap stocks in different stages in the economic cycle. Investors need to alter their composition in their small and microcap portfolios for the changes in the economic cycle e.g. position defensively or position for growth. At Perennial, our Small Caps portfolio has performed well across a number of different cycles since 2002. The portfolio is altered and monitored each day to take advantage of new information or changes in market sentiment to ensure that Small and Microcaps will continue to provide positive capital growth over the long run.
When the markets are very defensive, large caps may tend to outperform small and microcaps. (This is a general statement and it may not occur in the future.)
What opportunities are out there to invest in Small and Micro caps?
There are lots of opportunities in the Australian market for investors who are seeking small and microcaps. You can read about these here:
- Do Small and Microcaps pay dividends?
If you think about small and microcaps and the stage that they are in the business cycle, you can see that much of their net profit will be recycled back into the business for growth and expansion purposes. Whilst some companies do pay dividends, it is more than likely that dividends will be small or none at all. On the other hand, this is compensated by the possible capital growth likely to be received from small and microcaps.
The above is not intended as personal advice and is general advice only. We do not know your personal financial circumstances and recommend you seek advice prior to making any investment decision.
