The New Small – Adding Alpha with Micro Cap Stocks
Introduction
Micro cap stocks are among the investment world’s worst-kept secrets. They have been around as an asset class category since the 1980s, and research has repeatedly confirmed the advantages they offer to investors – most notably a chance to exploit numerous opportunities for greater excess returns.
Yet this remains a comparatively neglected sub-asset class, or investing niche. Micro caps typically are mentioned either in passing or not at all in investment guides and dictionaries of financial terms. As the smallest of small stocks, they scare off some investors who perceive them to be too volatile or not worth the risk.
We believe their risk has been exaggerated and their potential rewards overlooked. This widely under-followed segment of the U.S. equities landscape offers compelling opportunities for long-term investors, particularly when investments are made through skilled active managers. Micro caps over the long term have been shown to deliver strong returns and outperform all other market cap asset classes.
Micro caps’ size and role in investing have evolved over the years, and their appeal has strengthened. They remain the most structurally inefficient segment of the U.S. equity market, making them a shrewd long-term investment when access is available through good managers with reasonable fees. As we will discuss at more length below, micro caps provide opportunities to obtain growth where others are not looking or will not venture.