The case for Quality Small Caps in a Diversified Portfolio
Small-cap stocks offer a compelling investment opportunity for those willing to embrace a higher degree of risk in exchange for the potential for superior long-term returns. By incorporating small-cap stocks into a diversified portfolio, investors can enhance their risk-adjusted returns and gain exposure to companies with high growth potential.
However, we argue that a simple “buy the index” strategy is flawed. The S&P/ASX Small Ordinaries Index has lagged the broader All Ordinaries Index. We believe this is a result of low-quality, loss-making companies dragging down the segment. Successful small cap investing is best executed by stock pickers. After a period of sustained underperformance, we see an opportunity to increase exposure to Quality small caps to a well-rounded portfolio.
