Microcaps

[PsyopRanger]

I own a little BRSIX (Briedgeway Ultra-Small Company Market) about 5% of overall holdings.

I am thinking about increasing my allocations, does anyone else like or use Microcap funds?

Is there any reason I should not have a microcap?

 

[brewer12345]

Only trouble is that I think it is tough for the funds to invest without boosting up the price of the stock. Watch the fund carefully for asset bloat and look at the average market cap of their holding over time to make sure they don't creep up too much.

Personally, I'd rather cut out the middle man.

 

[LOL!]

IWC, FDM, PZI are mentioned in the September Better Investing article on microcaps.  It might be worth a read.

Some of the volume of these things is miniscule.  For example, PZI right now has traded 24,500 shares today.  At $15 a share, that ain't much to sneeze it.  If you had a $2MM portfolio and wanted a meaningful 2% of that to be in microcaps that's $40,000 or roughly 10% of today's volume of PZI.  I would sure hate to have my trade 10% of the daily volume of anything.

Edit: Just checked volume of FDM, quote says 800 shares were traded so far today.

 

[saluki9]

Bridgeway does a pretty good job, I invest personally in DFSCX but they're working on the same idea I just think that DFA does a better job with the execution because many of the stocks are very thinly traded.

Can't say I agree that you would be better to cut out the middle man. Many of theses companies will not blossom into small, mid or large cap stocks. They have a pretty high failure rate and it's often left (other than the recent rally) to a few stocks in the bunch with spectacular returns. I don't trust anybody's stock picking skills that much

Also, Unless you have a really high risk tolerance I wouldn't venture above 5% in Microcap considering their current valuation

 

[TargaDave]

One observation and question to add to the other good posts here. Barron's defines a microcap as companies with a market cap at or below $250M. I noticed all of the largest holdings in BRSIX have market caps well over $500M. I wonder what the weighted average market cap for BRSIX really is? I just think it's almost impossible for these funds to accumulate any real microcap volume due to the low float and trade. Perhaps more of a glorified small cap fund?

To me investing in real micro-caps (plenty out there under $150M) is like investing in start-up companies that just happen to be public. You the investor are playing the role of the VC-Angel but without VC-Angel insider knowledge or the requisit VC-Angel testosterone driven machismo

 

[brewer12345]

Yes, investing blindly in microcaps is risky. Anyone interested in microcaps either has to do a lot of research or hire someone to do it (Bridgeway, etc.). But I think that you really have to watch the manager really carefully if you do this via a mutual fund for exactly the same problems arif mentions.

Most microcaps aren't that hard to analyze simply because they are usually pretty simple companies operating in one or two lines of business. Much, much easier than something like GE. The rub is that you have to get it right because a microcap is unlikely to have a "plan B" to fall back on if their main business gets into trouble.

 

[wabmester]

The rub is that you have to get it right because a microcap is unlikely to have a "plan B" to fall back on if their main business gets into trouble.

Microcaps are like junk bonds. Nobody should buy just one, but if you buy a fund with a broad holding, you can capture the excess returns and diversify away much of the risk.

I like IWC. About 1000 stocks. Passive index. Fairly low cost.

 

[cons]

to OP.....if you feel that microcaps have a place in your overall asset allocation and portfolio, then you're fine with 5% of BRSIX in there.

i have microcaps in my portfolio as well (BRSIX), however, it's 3.5% of my total portfolio. it may go to 5% at some point in the future, but never beyond that.

 

[dunc0029]

I own RHJ Microcap (closed). It had been doing fantastic, but has tailed off this year. As people have mentioned, diversity takes care of some of the risk. I don't think 5% is too much. It obviously depends on your risk tolerance. I don't have a good smallcap fund offered in my 401k, so I went with the Microcap instead. I'm probably a little over exposed, but I have a high tolerance for investment risk.