From a March 20th Globe and Mail articled titled “Small-Cap Funds Soar in Early Stages of Recovery”, which highlights the one year return of some well known Canadian small-cap mutual funds.
Small-Cap mutual funds, which focus on buying shares of smaller companies, have historically outperformed in the first year of a market recovery, and last year was no different. The popular BMO small cap index has a 1yr return returned 87.6% compared to 47.6% for the TSX Canadian index.
Small-cap companies tend to do well in early stages of recovery because of their presumed higher growth potential than larger companies. Also, they do not have the widespread stock analyst coverage that larger companies have. Fund managers have a better opportunity to uncover overlooked companies.
There is a flip side to this of course. Small-cap funds are more volatile than large-cap funds. Smaller companies have a harder time securing credit and offer less diversified revenue streams than larger companies. It should be mentioned that the BMO small-cap index fell 46.7% during the “great recession” of 2008, versus only 33% for the TSX.