International small caps require commitment: S&P

International small cap stocks have outperformed both large and mid-caps over the past decade, but investors need to show commitment if they want to fully capitalise on the potential benefits of the sector.

This is the main point found in a report by researcher Standard & Poor’s Fund Services (S&P), which suggested investors ride out the ups and downs and invest for a minimum of five years to take advantage of the overall strong performance.

The report, The Pros and Cons of Investing in International Small-Cap Funds, investigated the ten-year performance of international small-cap stocks and assessed the pros and cons of including international small-cap funds in investors’ portfolios.

S&P analyst, Simone Gavin, warned investors against greater risks and volatility linked to this sector.

“International small-cap funds tend to perform better as economic conditions improve and this has held true as the world recovered from the global financial crisis,” Gavin said.

“However, it should be noted that smaller companies tend to become overpriced as investors discount the improving economic conditions and typically underperform as growth decelerates,” she added.

Gavin also noted there were a limited number of opportunities in the Australian market to gain exposure to international small-cap funds.

“The products available are diverse … so investors need to assess which is appropriate for their specific needs,” Gavin said.