‘Small Caps’ are not hats for children

August 10, 2016

 

Share market jargon calls really big companies ‘’Large Caps’’, with the term Capitalisation referring to the total value of all the shares on issue. This generally describes the biggest 50 companies listed.

 

Then there is ‘Mid Caps’ which is a tier underneath representing the next 250 largest companies. This then brings us to ‘Small Caps’, a further tier underneath, where we see there is an opportunity for some investment value.

 

Now just because the market refers to these as ‘’Small’’, it doesn’t mean they are small. Some of these firms are valued at $100m+. Only in comparison to the Blue Chip biggies could you possibly use the word ‘Small’ in their description.

 

But, across the world, the plunging interest rates have made really large companies that pay a regular dividend very attractive. People are prepared to pay a lot more now for those shares, just to get their hands on this regular income. Australian banks being a perfect example. Value has just about been totally pushed out of this equation.

 

If you look at a comparison chart of small versus big shares over many years, they have roughly stayed on a similar path. If one goes up 10% in a year, the other wouldn’t be far off. But when this chase for yield really got going a few years ago, a striking divergence developed on this chart. There was a tremendous surge of money towards the big end and Small Caps got left behind. The health of these smaller firms hasn’t changed, it’s just that investors’ attention was elsewhere.

 

 

All these things over time correct themselves and there is a definite argument here for having a holding in funds that specialise in picking winners within these Small Caps. There may be less discussion about dividends, but if they significantly outperform the big end, you can consider that extra return as your dividend.

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