“Long-awaited” shift towards small caps incoming: Prime Value

Favourable conditions could set the stage for a small cap comeback according to Prime Value Asset Management, allowing investors who follow the momentum to capitalise on ‘discounted’ opportunities with potential for strong performance over the long-term.

Richard Ivers, portfolio manager of the Prime Value Emerging Opportunities Fund and Prime Value Microcap Fund, said a combination of equity market conditions and easing economic policy has helped boost small cap company momentum.

“A confluence of factors has spurred this long-awaited shift to small cap companies,” he said.

“Interest rate cuts are providing increased confidence in the economic cycle, and there is a strong historical correlation between rate cuts and performance in smaller companies. The momentum gathering in equities markets generally has also boosted confidence in the higher-risk segments of the market.

“And small cap companies are still trading at large discounts relative to large cap companies, and in many cases represent outstanding value.”

Despite a track record of underperformance that has dashed investor confidence over the last few years, small cap companies had shown their resilience during the recent reporting season that highlighted strong earnings growth.

Ivers said while the current index-investing-preferential environment has not been conducive to small caps performance, a robust stockpicking approach could always add value to portfolios.

“We’re finding a lot of smaller stocks that look mispriced to us. And we think small caps generally are due some outperformance as well,” he said.

“Companies broadly are seeing resilient spending, but they are optimistic about what is to come given interest rates and the positive impact on consumer sentiment. Cyclically, housing stocks are starting to benefit, along with consumer discretionary, and AREITs are also poised to do well.”

“There is such a wide diversification of opportunities in small cap companies that you can always find good opportunities.

“We know that over the longer term there are big advantages in staying invested in this sector, regardless of where the broader market is going. The key is being consistent with your process.”