The advantages of investing in microcaps

Although past returns never guarantee future ones, several studies have shown that microcaps outperform large caps over the long term. We identify two main reasons for this outperformance:

  • First of all, given their small size, microcaps are structurally inaccessible to professional investors with large sums of money to invest. Indeed, most investment funds must invest in mid and large caps because it is the only place where they can invest large amounts. The result is a rather inefficient microcaps market in which the competition is not very fierce.
  • Then microcaps offer little liquidity. Liquidity is the ability to buy or sell financial assets quickly, inexpensively and without having a significant effect on prices. This characteristic is generally desirable for stock investors. Therefore, there is a return premium to compensate investors who choose to invest in less liquid securities such as microcaps.

These two characteristics represent for us great advantages and they enable us to find exceptional opportunities well before the other actors in the market.