Does small cap investments have the potential to deliver big?

Smaller companies often grow at a much greater speed than older, larger companies.

For all their potential, smaller companies can be risky. Volatility is high but the rewards are impressive for those who have the experience and resources to uncover the gems.

To reduce exposure to risk investors can choose a smaller company fund rather than buying individual stocks.This way they get a professional manager and the benefit of diversification.  

Experience counts in this arena even more than in others. A successful manager will develop an instinct that warns them when something does not feel right about a company, together with the skills to ask the right questions to pinpoint the trouble. It sounds trite but it is essential to maximise winners and minimise losers.

Diversification can reduce individual stock risk and smooth out some of the volatility. There’s nothing wrong with high conviction management, but in the small caps arena when a company hits trouble it can collapse quickly, so we recommend the protection given by a portfolio diversified across more than 100 stocks.

Managing that many stocks, particularly in this arena, requires plenty of people. It is important to ensure that the fund is run by a decent sized team which has the capacity to follow a large number of companies. For my money it is crucial for a small cap fund manager and his team to spend a great deal of time getting out to meet managing directors and really understanding their companies.

This bottom up approach is the key to finding the jewels in the small cap arena. And they are out there:
up-and-coming firms, with strong management which have developed innovative and competitive products or services that are capturing market share.