Step out with Small Caps

Private clients have traditionally been more averse to investing in smaller companies, favouring blue chip names that provide superior liquidity and lower risk. Validity for this preference may centre upon the typical attributes of such stocks. The client has some degree of comfort in the knowledge that larger companies are normally characterised by a proven track record, strong management expertise and quite often dominance in their respective businesses. This is usually reinforced by the ability to weather economic cycles and to take advantage of growth opportunities, be they organic or via acquisition.

Investing in small cap stocks is certainly not for the fainthearted. Indeed, many smaller Irish companies have languished in recent years, despite the fact that the overall market has generally increased. This trend has not been restricted to the Irish market as small caps in the UK, US and Europe have been similarly friendless.

Yet, contrary to the perception that smaller companies are destined to underperform, history has shown that these stocks have actually provided superior returns over longer time periods. Using traditional valuation measures, Irish small caps in general look undervalued with many trading at a significant discount to the market in general. Consequently, although small caps are possibly not as alluring as their large cap peers, it is inevitable that they will catch the eye of investors searching for undervalued opportunities.