Investors who focus on myths dogging the small-cap sector risk missing out on solid earnings growth and high sustainable dividend yields, an Investors Mutual Limited (IML) senior portfolio manager said.
Simon Conn, who joined the company 14 years ago and manages three small-cap portfolios for the group, said small stocks were often seen as volatile but some offered some of the most stable earnings streams in the market.
Traditionally, a small-cap stock is defined as any company outside the S&P/ASX 200 Index but at IML, it is any company outside the top 50, Conn said.
He said another misconception is that the quality of small-cap companies is poor.
"There are some very high-quality businesses in the small and mid-cap space," Conn told an adviser briefing yesterday.
He cited Australian paint company Dulux, New Zealand-based casino operator Sky City and Guinness Peat Group (GPG) as examples. GPG owns Coats, the world's biggest supplier of thread to the garment industry.
"Coats supplies the thread in one in every five garments in the world," Conn said.
"Not in Australia. In the world."
Conn said Dulux, with its Dulux, Cabots, Sellys and Yates brands, was the dominant paint and adhesives company in Australasia.
He said the products were used mainly in the maintenance and renovation end of the residential market - not housing construction - stripping much of the cyclicality out of Dulux's earnings stream.
"We like Dulux because it offers steady growth, strong cash flow and dividends," he said.
The perception that smaller stocks offer only capital gain is also wrong, Conn said.
"There are established companies in the small and mid-cap industrial space that pay good levels of dividends, which are sustainable and often franked," he said.
Conn named hotel and entertainment company Amalgamated Holdings, which is forecast to yield a fully franked 6.3 per cent in the 2012 financial year, and energy utility owner Duet, set to yield 9 per cent.
