Prashant Bhayani, head of European and international small-cap equity at Goldman Sachs Asset Management (GSAM) said that smaller companies would continue to be the best performers in 2005. A decline in the number of analysts covering small caps means the market is more under-researched than ever before, thus it is more inefficient and therefore offers more opportunities, he argued. The average number of analysts covering a European large cap is 25, compared with five covering the average small cap, according to GSAM.
As a result, “stock selection is the key to successful small-cap investing”, said Mr Bhayani
He added that “gains can be made through building strong relationships with and access to company managements” – tactics not possible in the large-cap arena where many more investors and analysts have their eye on the stock.
The Edinburgh Small Companies Trust, a subsidiary of Standard Life Investments is among those cashing in on small caps. It was up 12.2 per cent for the six months to 31 December 2004, compared with 7 per cent returned by its benchmark, the Extended Hoare Govett Smaller Companies index. Donald MacDonald, chairman, said the trust benefited from participating in three initial public offerings that “performed strongly after flotation”. RM
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Small caps ‘offer biggest returns over long term’
March 2005
The smallest stocks offer the biggest long-term returns, according to research from the London Business School. An investigation into the past performance of British equities has shown that £1 (€1.42) invested in the UK market at the start of 1955 would, with dividends reinvested, have grown to £549 by end–2004. By contrast, an equivalent investment in micro-caps (the smallest 1 per cent of companies) would have yielded a massive £9834, revealed Paul Marsh, professor of finance at the School. Related articles: |
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