Why global small-caps

History shows ample evidence that investing in small-caps has offered highly attractive investment returns. Small-caps have outperformed large-caps by more than 2% on average per annum since 1926*. This superior performance has been achieved despite so-called ‘reverse survivorship bias’, which is the dual drag coming from weak large companies turning into small companies on top of bad companies going bust, leading to their elimination from small-cap benchmarks.

We believe the reasons for superior small-cap returns are structural:

  • Niche. Smaller companies have frequently carved out a market niche for themselves, in which they have an excellent reputation, leading to pricing power and a sustainable high return on invested capital;
  • Growth. It is generally easier for companies to grow from a small base. The likelihood of identifying companies whose value can increase substantially is therefore much greater for small companies than large companies;
  • Under the radar. Small companies are more often mispriced as a result of information scarcity. Small companies generally receive very little attention from newspapers and are covered by fewer, if any, brokers. This can consequently create situations where the price of a small company’s share price can diverge materially from what an informed investor would be willing to pay for a business;
  • Management. Smaller companies are more often managed by founders or other individuals with significant equity ownership, ensuring close alignment with smaller shareholders. One of the key benefits is a focus on the long-term, and an increased willingness to sacrifice short-term profits for sustainable growth.

Historically, smaller companies operated locally or regionally, whilst today most equivalent-sized companies are producing and distributing their products and services on a global scale. In our pursuit of attractive companies active in growing niches, we believe that global small-caps, without regional constraints, offer the best chance to achieve strong long-term investment returns.

* Source: Ibbotson SBBI

silvercrossAdmnWhy Global small-caps