In a note to investors, AXA IM head of Framlington equities Asia Mark Tinker explained that while small cap stocks “might be more volatile, they actually have a lower beta” than other stocks, due to their price movement being driven by idiosyncratic factors rather than broader macroeconomic trends.
“Citi estimate that while 80 per cent of the move in the share price of large cap stocks – top 100 large caps – is due to macro factors, for small caps the number is half that,” he said.
“Put another way, 60 per cent of small cap share price movement is down to idiosyncratic factors.”
Mr Tinker said the risk associated with these idiosyncratic drivers could be mitigated through diversification, adding that over longer time frames, small cap drawdowns were no worse than other asset types.
“For example, the rolling three year largest drawdowns for small caps are now the same, if not less, than large caps and noticeably less than for emerging markets,” he explained.
Mr Tinker did caution however that research on small cap equities is “relatively thin” when compared with their large cap peers, and that investors should look for a specialist fund manager to “do their own research”.
“In the US, the average number of analysts per large cap stock, defined as greater than $10 billion market cap, is 21; while for mid-cap stocks – $2 billion to $10 billion – it is around half that, at eleven. For small caps it is just three,” he said.
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