1. Myths and Realities of Microcap Investing
Paul Carter, CFA
Point Defiance Capital Management LLC April 23, 2013

2. Microcaps Often Get a Bad Rap
From SEC’s “Microcap Stock: A Guide for Investors”1
“Lack of Public Information… information about microcap companies can be extremely difficult to find, making them more vulnerable to investment fraud schemes.”
“Risk…microcap stocks are among the most risky. Many microcap companies tend to be new and have no proven track record. Some of these companies have no assets or operations.”
1 Source:

3. Definition MSCI USA Micro Cap Index (932 stocks)1
Market Cap Range: $2 mm - $564 mm
Median: $73 mm
Russell Microcap Index (1,510 stocks)2
Market Cap Range: $30 mm - $565 mm
Median: $152 mm
Dow Jones Select MicroCap Index (272 stocks)3
Market Cap Range: $0.0 – $1.0 billion
Median: $0.3 billion
1 Source:
2 As at 2012 reconstitution; Source:
3 Source:

4. Russell Indexes
Source:

5. Some Common Beliefs about Microcaps
They are a bunch of tech/biotech stocks.
They are companies of low quality.
The costs to trade them are extremely high.
It’s hard to borrow / short these stocks.
If a tree falls in the forest, does anybody hear?
Correlations among microcaps are high.

6. Sector Diversity
Source: Baseline, Point Defiance Capital Management calculations

7. Quality of Microcaps
Source: Baseline, Point Defiance Capital Management calculations

8. Microcaps Are Often Well Known

9. How Hard are Microcaps to Trade?
Source: Baseline, Point Defiance Capital Management calculations

10. How Hard are Microcaps to Trade?
Source: Baseline, Point Defiance Capital Management calculations

11. How Hard are Microcaps to Trade?
Source: Thomson ONE, Point Defiance Capital Management calculations

12. Short Interest
Source: Baseline, Point Defiance Capital Management calculations

13. Analyst Coverage
Source: Baseline, Point Defiance Capital Management calculations

14. Do Microcaps Move?
Source: Baseline, Point Defiance Capital Management calculations

15. Do Microcaps Move Together?
Source: Baseline, Point Defiance Capital Management calculations

16. Conclusions about US Microcap Stocks
Lots of opportunities by sector/industry.
Plenty of “good” companies, although the quality range is wide.
Trading costs are significant.
Relatively little competition to short.
News often moves these stocks a great deal.
Correlations among stock returns are low.
Inefficiencies, and therefore opportunity to get an edge, are high.

17. Paul Carter, CFA Point Defiance Capital Management LLC April 23, 2013
Thank You
Paul Carter, CFA
Point Defiance Capital Management LLC April 23, 2013

18. Investment Management in Microcap
The Case For Microcap
Dennis Jensen, CFA – Director of Research

19. Microcap – A Rich Opportunity
Inefficiency creates better return opportunity
Little institutional attention to Microcap stocks
A diversifying space within US Equity (stock specific)
Shares some advantages of Private Equity strategies, but avoids some disadvantages
Microcap companies are common targets for M&A activity

20. Annualized Active Manager Outperformance
The Average Manager Outperforms
Annualized Active Manager Outperformance
Period ending June 30, 2012
Source: Acuitas, Evestment, Russell Investments.

21. Why Doesn’t Everyone Do It?
Large investment managers can’t manage enough money to support infrastructure
Large brokers can’t generate trading volume
Investors that rely on brokers for research are at a disadvantage
“Competitors” end up being insiders, individual investors, local brokers, etc.
The bottom line – most institutional investors don’t even try!

22. Unique considerations for managers
Tug-of-war between resources and business viability
Efficiency in idea generation and research is critical
Far easier to gain an ‘informational’ advantage
With power comes responsibility (on your own with research!)
Does anyone care? Discovery is powerful
Avoiding the ‘garbage’ puts wind at your back
DON’T MANAGE TOO MUCH MONEY

23. Microcap Products with Low Asset Bases Outperform
Microcap Universe Performance by AUM
10 years ending June 30, 2012
Source: Acuitas, Evestment, Russell Investments. Annual returns are based on asset level as of the start of each 12 month period beginning June 30.

24. Discussion