The key attraction of SmallCap is that, over the long term, investors make more money than from investing in large companies.  It is easier for small companies to grow faster than large companies; hence they offer investors the potential for higher returns.  Taking UK SmallCap as a proxy for Europe (because the data goes back much further), since 1955 SmallCap equities have produced annual returns of 15.4% and outperformed LargeCap by an average of 3.2% per annum (the “SmallCap Effect”) which, when compounded over time, has produced returns almost five times greater. 

We believe that the SmallCap Effect is more marked in  Europe outside the UK, where  markets can be even less efficient as a result of language, cultural and geographical barriers, where there are many more companies to choose from and where there is often far less research available. 

The SmallCap market gives investors access to world leading companies managed by dynamic entrepreneurs operating in attractive niche markets.  However, due to lack of broker research and the illiquidity of their shares, they require a lot of time and a level of in-house resources beyond the scope of most institutions.  This is why many institutions are attracted to the asset class and equally why they will outsource the day-to-day investment decisions to dedicated specialists such as Montanaro.