A Returns-based Approach: Incorporating Microcap in Equity Allocations

October 11, 2017 by Ehren Stanhope

We are often asked how much should be allocated to microcap equities. As long-term investors that view the opportunity set through the lens of factors, our answer is usually some version of "probably more than you currently do." There is little empirical research specific to the intricacies of microcaps, and common benchmarks cast a shadow on the alpha that is readily apparent in active manager returns and factor spreads. This post attempts to provide an alternative framework for approaching and sizing strategic allocations to microcaps.

Micro Caps, Factor Spreads, Structural Biases, and the Institutional Imperative

July 29, 2017 by Ehren Stanhope

The final installment in this micro cap series touches on the massive factor spreads available in the micro cap space, structural biases that keep large investors out, and an argument for the persistence of factor returns.

The curious world of micro caps—leveling the playing field

July 22, 2017 by Ehren Stanhope

Investing in micro caps poses a challenge for stock pickers. There's lots of noise in the data and, as we saw in the previous post, investing in micro caps requires expertise in many different types of investment situations—venture, growth, distressed, etc. This post attempts to cut through some of the noise inherent in micro caps to level the playing field.

The curious world of micro caps—evolving and devolving businesses

July 15, 2017 by Ehren Stanhope

For this post, I define the opportunity set of micro caps a bit differently than common benchmarks. I discuss some of the fundamental drivers of micro cap businesses and how their stage in the business life-cycle can distort fundamental metrics. Historically, 41% of the universe is in some sort of transition—evolving to new heights or devolving towards liquidation—which creates lots of noise in the data, and scares lots of investors away.

The curious world of micro caps—faulty benchmarks

July 09, 2017 by Ehren Stanhope

I've recently been exploring the world of micro cap stock investing. You don't hear much about this space except from the occasional banner ad promising a 10,000% return in a week by buying penny stocks. So I think micro cap gets a bad wrap. This is the first installment in a series on micro cap stocks. This area of the market is a playground for disciplined investors that believe in the power of factors.