Big value in small caps?
In this issue, we delve deeper into our analysis on small cap companies and how they can offer investors higher average returns over the long-term.
Our analysis shows that small caps outperform during phases of economic recovery and expansion, but they tend to lag during downturns and recessions. However, looking at returns over a longer period of time over economic cycles clearly shows that small caps outperform the broader market. Therefore, taking a long-term view is crucial when investing in small caps. Additionally, our portfolio optimisation shows that allocating a portion to small caps improves the return profile without compromising on the risk level.
We believe that small caps are a segment where active fund managers can deliver significant outperformance. Compared to mid and large cap companies, small caps receive significantly less analyst coverage, therefore offer greater opportunity for alpha generation. Moreover, active management may help to minimise transaction costs, which are often more significant in the small cap segment.