Global Investors Can Look North for Big Gains from Small Stocks

Canadian micro-cap stocks, the smallest of the small traded companies, may be an overlooked, and potentially lucrative, investment that historically has offered relatively high returns, according to new research publishing this week in the Investment Management Consultants Association® (IMCA®) Journal of Investment Consulting.

  • Share on TwitterShare on FacebookShare on Google+Share on LinkedInEmail a friend
'...Canadian micro-cap stocks appear to represent a unique asset class and that investing in this unique asset class can improve the risk-return characteristics for global investors’ overall portfolios.'

Denver, CO (PRWEB) August 12, 2014

Canadian micro-cap stocks, the smallest of the small traded companies, may be an overlooked, and potentially lucrative, investment that historically has offered relatively high returns, according to new research publishing this week in the Investment Management Consultants Association® (IMCA®) Journal of Investment Consulting.

For their article “Northern Exposure: How Canadian Micro-Cap Stock Investments Can Benefit Investors,” authors Stephen R. Foerster, Ph.D., CFA®; Lionel Fogler, MBA, CIM®; and Stephen G. Sapp, Ph.D., reviewed data from the Canadian Financial Markets Research Center from 1950–2009. They focused on the smallest 10 percent of publicly traded companies, micro-caps, examining the benefits of portfolio diversification, international diversification, and diversification across the size or market capitalization.

“We conclude that these findings demonstrate that Canadian micro-cap stocks appear to represent a unique asset class and that investing in this unique asset class can improve the risk-return characteristics for global investors’ overall portfolios,” they wrote. “The ways that micro-cap stocks can contribute to investors’ actual portfolios have not been rigorously investigated.”

Through their study, the authors concluded that small stocks do, as has been commonly assumed, have higher volatility than larger corporations, but the potential exists for longer-run market-beating returns after adjusting for such risks as the smallest stocks’ sensitivity to underperformance during periods of crisis.

Even taking into account some potential constraints limiting the ability to invest or trade micro-cap stocks, such as limited average trading volume, including Canadian micro-cap stocks in a diversified portfolio may still be worth pursuing, the authors conclude.

The authors chose to focus their research on Canada because Canada and the United States are recognized as having the world’s most comprehensive trading relationship and micro-cap stocks are more prevalent in Canada than in the United States.

The team is careful to note that there are constraints on trading micro-cap stocks because of the small float and low-liquidity in some cases, and they stress that investing in micro-cap stocks should be investigated only as a part of an overall broadly diversified portfolio. There are, however, potential benefits, the study concludes.

“We find clear evidence that both types of investors (Canadian and those living outside of Canada) can benefit from diversification that includes a tilt toward Canadian micro-cap stocks,” the authors wrote. “We document that Canadian micro-cap stocks have demonstrated superior long-term return performance compared to larger stocks.”

Margaret Towle, Ph.D., CPWA®, is editor-in-chief of the Journal. She said the article spotlights opportunities available to global investors.

“The authors’ research validates the concept that investing in Canadian micro-caps expands the opportunity set for global investors to capture price inefficiencies,” Towle said. “In addition, the Canadian micro-cap market offers a diversity of investment options beyond the energy sector, while the recent increase in income from a positive labor market (especially in the Western provinces) creates a significant multiplier effect on the economy.”

Foerster is a professor of finance at the Ivey Business School at Western University in London, Ontario, Canada. Fogler is vice president and portfolio manager at Kingwest & Company in Toronto. And Sapp is an associate professor of finance at the Ivey Business School at Western University.

The Journal of Investment Consulting is an academic publication from Investment Management Consultants Association focused on empirical, graduate-level research, including commentary from academic authorities, industry leaders, and award-winning authors. The publication keeps investment advisors and wealth managers abreast of new research findings in investments and private wealth management.

Also in the new issue of the Journal of Investment Consulting are other articles focused on global investment opportunities and issues. Other articles include:

Multi-Style Global Equity Investing: A Statistical Study on Combining Fundamentals, Momentum, Risk, and Valuation for Improved Performance, by David J. Garff, CIMA®
Emerging Market Outperformance: Publicly Traded Affiliates of Multinational Corporations by K. J. Martijn Cremers, Ph.D.
The Relative Asset Pricing Model: Toward a Unified Theory of Asset Pricing by Arun Muralidhar, Ph.D., Kazuhiko Ohashi, Ph.D., and Sunghwan Shin, Ph.D.
Flexibility Theory as a Corporate Governance Mechanism by Kurtay Ogunc, Ph.D., MBA
And the latest in the Masters Series, By the Numbers: A Discussion of Risk Management and Quantitative Investing with Robert B. Litterman, Ph.D.

IMCA.org

Established in 1985, IMCA is a nonprofit professional association and credentialing organization with more than 9,400 individual members. IMCA members collectively manage more than $1.9 trillion, providing investment consulting and wealth management services to individual and institutional clients. Since 1988, IMCA has offered the Certified Investment Management Analyst® (CIMA®) certification, which earned accreditation by the American National Standards Institute (ANSI) in April 2011, making it the first financial services credential in the United States to meet international standards (ISO 17024) for personnel certification. IMCA’s Certified Private Wealth Advisor® (CPWA®) certification is suited for wealth management professionals working with high-net-worth clients. In 2013, IMCA conferences and workshops hosted more than 4,000 attendees.