While small cap stocks are generally associated with higher risk due to their relatively smaller size and potential volatility, they can also provide unique opportunities for growth and long-term returns. Here are some key reasons why active investing in small cap stocks can be beneficial.
Small cap stocks usually represent young and growing companies with significant potential for expansion. By identifying promising small cap stocks early on, investors can potentially benefit from the growth trajectory of these companies as they mature and increase in value.
Including small cap stocks in a well-diversified portfolio can enhance overall diversification. Small cap stocks often exhibit low correlation to other asset classes, which can reduce portfolio volatility and potentially increase risk-adjusted returns.
Small cap companies are typically more agile and adaptable compared to larger corporations. They can capitalize on emerging trends and implement innovative strategies, enabling them to seize growth opportunities and navigate market conditions more effectively.
Small cap stocks tend to receive less attention from analysts and institutional investors compared to large cap stocks. This relative lack of coverage can create market inefficiencies and undervalued opportunities, which investors who have done their own analysis can capitalize on.
*Diversification does not ensure a profit or guarantee against a loss.
Greater Growth Potential
Small cap stocks often have higher growth prospects compared to large cap stocks. These companies are typically in their early stages of expansion and have more room to grow their revenues, market share, and profitability. As a result, small cap stocks can offer investors the potential for significant capital appreciation over the long term.
Niche Market Opportunities
Small cap stocks often operate in niche markets or specialized sectors that are underserved or less covered by large cap companies. This can create opportunities for small cap companies to establish dominance and capture market share in their specific industries. Investors who can identify promising small cap companies in niche markets may benefit from their potential for above-average growth and profitability.
Due to the lack of analyst coverage, small stocks may not receive the same level of attention and scrutiny as larger companies, creating greater dispersion between stock prices and fair value. While this may create challenges for average investors, these become potential benefits for seasoned investment professionals.
Because small stocks are often overlooked by analysts, ‘hidden gems’ may possess pricing inefficiencies that can be exploited by investors who have done their own research and analysis. This can lead to outperformance compared to the broader market or to peers who are only investing in larger, more heavily covered stocks.
Source: Morningstar. Small Cap Stocks represented by the Morningstar US Small Cap Index. SMID Cap stocks represented by the Morningstar US SMID Cap Index. Large Cap stocks represented by the Morningstar US Large Cap Index. See disclosure for index definitions.
Small cap stocks have historically demonstrated greater
return potential relative to large cap stocks, with
small caps outperforming large caps in
60% of 10-year rolling periods.
Market Cap Representation
Small caps stocks are trading near their lowest aggregate market cap relative to large caps over the last 25 years, suggesting there is ample room for renormalization in favor of down-cap equities moving forward.
Source: Factset/Russell. See Disclosure for index definitions.
| Available Vehicles | CIT | Mutual Fund | Separate Account |
| Holdings Range | 45-55 Stocks |
| Market Cap | Primarily $500M – $5B |
| Mutual Fund Tickers | CAMSX (Investor Share Class) CAMZX (Institutional Share Class) |
| Inception Dates | Separate Account – 11/30/2004 CAMSX – 8/31/2004 CAMZX – 10/31/2008 |
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In his latest interview, Cambiar Portfolio Manager Colin Dunn provides an update on the small and midcap landscape, highlighting intriguing investment areas.
We examine why the vast opportunity set within the small cap landscape enables active managers to pinpoint investable opportunities versus a passive index.
RISK DISCLOSURE
Mutual fund investing involves risk, including the possible loss of principal. In addition to the normal risks associated with investing, investments in smaller companies typically exhibit higher volatility. There can be no assurance that the Fund will achieve its stated objectives.
To determine if a Fund is an appropriate investment for you, carefully consider the Fund’s investment objectives, risk factors and charges and expenses before investing. This and other information can be found in the Fund’s summary or statutory prospectus which can be obtained by clicking here or calling 1-866-777-8227. Please read it carefully before investing.
This material represents the portfolio manager’s opinion and is an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice or a specific recommendation of securities. There is no guarantee that any forecasts made will come to pass.
Cambiar Funds are distributed by SEI Investments Distribution Co., 1 Freedom Valley Dr. Oaks, PA 19456, which is not affiliated with the Advisor. Cambiar Funds are available to US investors only. Strategies included within the Separate Account section are not mutual funds and are not affiliated with SEI Investments Distribution Co.
*Quality and Valuation objectives analyzed when assessing individual portfolio companies are necessarily subjective and, therefore, may not be consistent with benchmark metrics, due to a number or factors including current investment sentiment, portfolio and benchmark composition, and other factors.
Definitions –
Morningstar US Small Cap Index: measures the performance of small-cap stocks in the U.S. It targets securities that fall between the 90% and 97% market cap thresholds of the investable universe.
Morningstar US Small-Mid Cap Index: measures the performance of small- and mid-cap stocks in the U.S. It targets securities that fall between the 70% and 97% market cap thresholds of the investable universe.
Morningstar US Large Cap Index: measures the performance of US large-cap stocks. These stocks represent the largest 70 percent capitalization of the investable universe. This Index does not incorporate Environmental, Social, or Governance (ESG) criteria.
Russell 3000® Index: measures the performance of the largest 3,000 US companies representing approximately 96% of the investable US equity market, as of the most recent reconstitution
The Russell 2000® Index: measures the performance of the small-cap segment of the US equity universe. The Russell 2000 Index is a subset of the Russell 3000® Index representing approximately 7% of the total market capitalization of that index, as of the most recent reconsitution. It includes approximately 2,000 of the smallest securities based on a combination of their market cap and current index membership.