Micro-caps a separate asset class

The micro-cap sector needs to be treated as a separate asset class to the listed market if investors are to take full advantage of undervalued companies, according to Acorn Capital portfolio manager Paul Palumbo.

“I think, as a general comment, micro-caps aren’t seen as a distinct asset class in their own right. They’re just seen as part of the listed market, and most people gravitate towards the top end of that market,” he said.

There was a lack of research in the micro-cap sector and that created pricing inefficiencies that could give investors the opportunity to take advantage of good company results, according to Palumbo.

Acorn Capital’s research team was trying to exploit that lack of research, Palumbo said.

“A stock that’s not on the radar of the investment or broking community can announce good results that are not immediately recognised by the market,” he said.

In contrast, the Top 200 companies in the listed market were heavily researched and every piece of news was immediately priced into their stocks, Palumbo said.

There were limited opportunities to make multiple times the return on your investment in the Top 200 companies as a result, he said.

The characteristics of the micro-cap space allowed for those opportunities, Palumbo said.

“A good manager who can exploit that can deliver significant value,” he added.