Big rewards from small caps

His top arguments included the following:

• the fact that you get a high value premium from a small size;
• small cap growth is typically twice that of large cap growth;
• unlike popular misconception, many small cap companies are well established, with only 5% being around for less than five years;
• there are a vast number of companies available for investor consideration;
• small caps tend to have a far higher degree of management ownership and attachment; and
• 98% of all mergers and acquisitions are small cap.

Although Hamilton did not shy away from the arguments against small cap—including the impact of economic fluctuations and their higher cost of doing business—he said that their returns are generally greater than that of bonds, so they can be an antidote to funds that are becoming increasingly heavily weighted toward fixed income assets.

He also argued for open-mindedness when it pertains to small cap investing. “Most investors have taken a passive decision to avoid this market,” said Hamilton. “If you come to the conclusion they’re not for you, that’s fine, but make it an active decision.”

In response to a question about how to research these companies, he pointed out that while the numbers are vast, analysis is often fairly straightforward. And while he didn’t evangelize, Hamilton did predict a payoff for those who give small cap a chance. “I’m absolutely sure that, 10 years from now, looking at returns made available by this part of the market, you will be handsomely rewarded by being invested down the capitalization scale.”

Suzanne Bowness is a freelance writer in Toronto. sue@codeword.ca