For small caps, the key investing question is whether they can grow into successful large cap companies and then sustain that success. Remember, Amazon and Microsoft began life as a small cap company.
To address these questions, long-term investors should focus on three key elements throughout their investment research:
- long-term growth opportunities,
- durable competitive advantages, and
- management quality.
The stock prices of small cap companies tend to be more sensitive to economic and market changes. Thus, looking at the long-term prospects is essential to the investment process.
Small Cap Companies
Developing an approach and commitment to investing in small caps can be a driver for your investment success. An investment process of extensive research and evaluation can give you an edge over passive products,.
The equity universe is vast, and only a small fraction of the stocks in it are large companies. This leaves plenty of choice for small cap investors, but few investors are skilled enough to successfully navigate through the thousands of choices and identify the best opportunities. As long as there is innovation and disruption, there will be attractive small businesses that have the potential to become larger and successful.
You should always seek and research these investment opportunities.
References:
Russell 2000® Growth Index measures the performance of small-sized U.S. companies that are classified as growth.
Risks: All investments are subject to risk and may lose value. Investors should consider the investment objectives, risks, and charges and expenses of the investment carefully before investing. Past performance is no guarantee of future results. The investment return and principal value of an investment will fluctuate; an investor’s shares, when redeemed, may be worth more or less than their original cost
- Alpha measures the difference between a fund’s actual returns and its expected performance, given its level of risk as measured by beta.
- Beta measures a fund’s sensitivity to market movements. The beta of the market is 1.00 by definition.
- Upside Capture explains how well a fund performs in time periods where the benchmark’s returns are greater than zero.
- Diversification cannot guarantee a profit or protect against loss.
- Downside Capture measures how well a fund performs in time periods where the benchmark’s returns are less than zero.
- Active Share is a term used to describe the share of a portfolio’s holdings that differ from that portfolio’s benchmark index. It is calculated by comparing the weight of each holding in the Fund to that holding’s weight in the benchmark. Positions with either a positive or negative weighting versus the benchmark have Active Share. An Active Share of 100% implies zero overlap with the benchmark. Active Share was introduced in 2006 in a study by Yale academics M. Cremers and A. Petajisto, as a measure of active portfolio management.
- Sharpe Ratio is a risk-adjusted performance statistic that measures reward per unit of risk. The higher the Sharpe ratio, the better a fund’s risk adjusted performance.
- Standard Deviation (Std. Dev.) measures the degree to which a fund’s performance has varied from its average performance over a particular time period. The greater the standard deviation, the greater a fund’s volatility (risk).
- The Dow Jones Industrial Average is a price-weighted measure of 30 U.S. blue-chip companies. It covers all industries with the exception of Transportation and Utilities. The total return version of the index is calculated with gross dividends reinvested.
- The S&P 500 Index measures the performance of 500 widely held large-cap U.S. companies. The indexes are unmanaged. Index performance is not fund performance; one cannot invest directly into an index. The indexes include reinvestment of dividends before taxes. Reinvestment of dividends positively impacts performance results.