Writing for Investor Daily, GSFM CEO Damien McIntyre discusses the benefits that global small caps can bring to a diversified portfolio.
With small caps (as shown by the MSCI World Small Cap index) outperforming the broader equity market (represented by MSCI World) over the long-term, it is clear that an allocation to global small caps should be an important part of portfolio diversification.
In fact small caps have returned twice that of large caps over the past 20 years. Considering that periods of underperformance for small-cap stocks generally coincide with recessionary environments, and that they historically tend to go on to outperform during an economic recovery, it is clear that now is not the time to be leaving them out of the portfolio contribution process.
One reason some investors avoid small-cap stocks is because of the perception that small-cap investing is linked to increased volatility. But this does not have to be the case.
By focusing on a concentrated portfolio of high-quality companies there is the opportunity to insulate investors from the unnecessary volatility seen with many small to mid-cap growth funds. The key is to look for exposure to high-quality businesses with high rates of return on invested capital that also exhibit considerable secular growth.