Many investors and advisers recognise that a diversified portfolio should include an allocation to equities across the market capitalisation spectrum. This allows investors to capture the “small-cap premium” which has shown persistence over medium and long-term investment horizons.
In this CPD-accredited article from GSFM’s investment partner, Toronto-based global small-cap specialists Cambridge Global Asset Management, the case for investing in global small caps is made.
Popularised by Nobel Prize winners Eugene Fama and Kenneth French, academics have been studying the “small-cap premium” or “size effect” for over 30 years. Why does this premium exist?
Fama and French hypothesised that the higher return premium is observed because small caps have higher systematic risk, while other researchers have put forth other ideas like behavioural biases and liquidity.
Although the small-cap premium is positive, it is cyclical and varies over different time periods. This means that it is important to have a long-term time horizon when investing in global small caps in order to capture the return premium and take advantage of the diversification benefits.
To read the article and do the CPD quiz, click here.