One of the challenges of investing in the stock market’s smallest companies is that many lack good quality research coverage. For some investors, this sort of information vacuum is enough to send them running for the hills. But for those prepared to do their homework, it can offer a chance to profit where others fear to tread.
To illustrate the potential power of smaller companies, it’s worth looking at the performance of a simple micro-cap strategy tracked by Stockopedia in recent years. Since 2012, the James O’Shaughnessy-inspired Tiny Titans screen has delivered consistently strong returns, including a 74 percent gain in the UK over the past two years. It’s achieving those results with shares that are valued at less than £150 million (and often much less) – so they’re right at the smallest end of the market. We’ll explore this strategy further in a moment.
The case for small-caps
There are some strong arguments in favour of having a small-cap allocation in a portfolio. Research into long-run investment returns shows that small-caps generally outperform large and mid-caps over time.
This is regularly shown in analysis by Credit Suisse and academics from London Business School. Their charts below show that between 1926…
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