EquitiesMay 29 2013

Small-caps no longer so risky, analyst says

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Industry research has questioned the popular theory that investing in small-caps is risky and come to a contrarian conclusion: the sector is no longer more volatile than large-caps.

James Dalby, market intelligence manager at Aviva, drew upon statistics from the IMA small-cap sector over a rolling three-year period and found that the average smaller company is now, volatility-wise, on par with large-caps.

When asked why volatility levels of small-caps have declined in recent years, Mr Dalby said the global recession has helped filter out weaker businesses, together with greater scrutiny in the sector from investment analysts.

“With the economy being so volatile of late, many of the weaker companies have been wiped out,” he said.

“Also, analysts have been spending more time looking at small-caps, while the large-cap sector has seen a lot of big businesses go out of business in recent years.”

Mark Dampier, head of investment research for Hargreaves Lansdown, also said that large-caps are not as safe as many investors assume.

Focusing on a wide range of issues that question the popular consensus, Mr Dampier said the liquidity of large companies means they often struggle in period of recession and that, as a result, it is wrong to assume that the sector is less vulnerable.

Furthermore, he added that the biggest companies in the world are exposed to risks in dozens of different markets, which can take their toll.

“Very large-caps tend to be multinationals and are therefore much more sensitive to global events and geopolitical problems,” he said.