Investing

In Context: Global Small Cap Equity

In Context: Global Small Cap Equity
clock
2 min, 42 sec

In small cap investing (U.S., international, emerging market, and global small cap) there are exploitable inefficiencies that are less available in large cap. Read on to learn more about some of the opportunities and challenges in this space.

Earnings revisions: In the large cap space, companies are typically covered by many sell-side analysts that are all forecasting earnings for a company. As one hypothetical example, Apple might have 40 or more analysts forecasting its earnings. Some may revise their forecasts over time, but the likelihood of a single revision moving the stock price is low. Also, with 40+ forecasts, it’s difficult for a (buy-side) investment manager to gain an information advantage with so many sell-side analysts covering the company.

In small cap land, a company is often covered by just one or two sell-side analysts (and sometimes will have no coverage at all), which offers greater opportunity for an investment manager to have a differentiated view. If one of two analysts revises their forecast it can have a meaningful effect on the stock price. Better yet, if there is no sell-side coverage, the investment manager is working off of their proprietary forecast. This inefficiency is just one example of how having fewer eyes on a company can lead to an information advantage.

Other Small Cap Considerations

Local exposure to a developing consumer: There’s a global theme of the “emerging consumer,” mostly in emerging markets. Small cap companies tend to serve these consumers. If you want to play the “emerging consumer” theme, small companies will make up a good part of that exposure. (When you look at the U.S., EAFE, or EM, the small cap indices have larger allocations to the Consumer Discretionary sector versus large cap.)

Supply chain: Investing in a supply chain as opposed to an end product offers unique opportunities. For example, if you like smart phones, do you buy Apple or Samsung? Why not buy a component supplier that sells to both? It could be a more reliable play on smart phone growth and you don’t have to know whether Apple or Samsung will “win,” as long as one of them does well. Suppliers can be smaller cap.

Higher growth rates: If an investor seeks significant capital appreciation, small caps can offer it — but beware, there’s a saying in small cap that “you either grow or go out of business.”

Simple companies, and lots of them: Small cap companies tend to be simple, often offering a single product or service. Investors who like to understand the companies they buy might find smaller companies appealing. There are also more stocks to consider. Of the 8,600 stocks out there globally, over 6,000 are small cap.

Risks

Although small cap investing can offer outsized performance potential, it usually comes with higher risk. Small cap companies typically:

  • Are higher beta than large caps (higher volatility)
  • May have higher default risk
  • Frequently are headed by a founder who might have a great product or service idea but less experience running a business
  • Tend to need financing, and special attention to the capital structure is warranted

Read our 2017 Capital Market Projections to see our 10-year forecast for various asset classes.

Posted by

Share
Share on facebook
Share on twitter
Share on linkedin
Related Posts
Public Markets

The Supermicro Conundrum: When Successful Small Cap Stocks Hurt Managers

Nicole Wubbena
Callan expert analyzes the impact of Supermicro on small cap growth managers.
Operations

A Deeper Look at How We Did With Our Capital Markets Assumptions

Julia Moriarty
An analysis of how Callan's Capital Markets Assumptions performed over time by asset class.
Macro Trends

Risky Business Update: Our 2024 CMAs Change the Equation

Julia Moriarty
Julia Moriarty provides an update to our famous "Risky Business" pie charts using our latest Capital Markets Assumptions.
Operations

Callan’s 2023 Capital Markets Assumptions: A Behind-the-Scenes Look

Capital Markets Research
This blog post details the process and reasoning behind the Callan Capital Markets Assumptions for 2023-2032, and provides detailed information about ...
Macro Trends

Risky Business Update: After a Historic Year, What’s Changed?

Julia Moriarty
Julia Moriarty provides an update to our famous "Risky Business" pie charts using our latest Capital Markets Assumptions.
Macro Trends

Hedge Funds and Ukraine: A Guide for Institutional Investors

Joe McGuane
Joe McGuane analyzes hedge fund performance in 2022 and how managers are handling the volatility stemming from the invasion of Ukraine.
Operations

A High-Level Summary of the Callan 2022-2031 Capital Markets Assumptions

Capital Markets Research
This blog post details the process and reasoning behind the Callan Capital Markets Assumptions for 2022-2031, and provides detailed information about ...
Macro Trends

The Story Behind Callan’s 2021 Capital Markets Assumptions

Capital Markets Research
An explanation of Callan's 2021-2030 Capital Markets Assumptions, how they were developed, and what changed from last year's projections.
Macro Trends

Risky Business Update: Investors Face Additional Challenges amid Increased Uncertainty

Julia Moriarty
An update to our original research on how much risk investors need to take to achieve targeted returns over time.
Operations

Captive Insurance Stepped in to Ease Pandemic’s Blow. Now What?

Callan Institute
Captive insurers have been able to support their parent organization during COVID-19 by providing relief from business interruption losses.

Callan Family Office

You are now leaving Callan LLC’s website and going to Callan Family Office’s website. Callan Family Office is not affiliated with Callan LLC.  Callan LLC has licensed the Callan® trademark to Callan Family Office for use in providing investment advisory services to ultra-high net worth clients, family foundations, and endowments. Callan Family Office and Callan LLC are independent, unaffiliated investment advisory firms separately registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940.

Callan LLC is not responsible for the services and content on Callan Family Office’s website. Inclusion of this link does not constitute or imply an endorsement, sponsorship, or recommendation by Callan LLC of their website, or its contents, and Callan LLC is not responsible or liable for your use of it. When visiting their website, you are subject to Callan Family Office’s terms of use and privacy policies.