Small-cap equities in emerging markets
With the investment case for Emerging Market equities remaining strong as global economies continue to recover from recession, some new research from S&P Indices explains how small-caps stocks tend to perform better than their larger-cap peers in emerging markets.
The S&P Emerging SmallCap Index has delivered a 16.6% compound annual growth rate (CAGR) over the past ten years, as of 30th September 2010.
This is compared to a 13.2% CAGR for the S&P Emerging LargeMidCap over the same period of time.
The SmallCap Index has beaten the LargeMidCap Index in eight out of the ten years between 2001 and 2010.
Over the past year, the performance differential between the two has been particularly stark, with he SmallCap Index returning 17.2% for the year to the end of September 2010 compared with 10.9% for the LargeMidCap Index.
As Emerging Market equities becomes a more mainstream asset class in the future, there could be an argument for carving out specific allocations to small or mid-cap stocks and large-cap stocks in this sector.
Investors (and their advisers) should also remember the usual investment risk warning – past performance is not necessarily a reliable guide to future investment returns.
Whilst looking at these figures from S&P seems to suggest the smart money is in small-cap Emerging Market stocks, investing in smaller companies brings with it additional risk factors, including liquidity risk.
There are also challenges associated with getting access to small-cap stocks in these Emerging Markets.
It is possible to make the investment case for just about anything by analysing past performance figures. The really smart approach towards investing money is to start by considering your financial goals and then construct a portfolio strategy to meet these, rather than allowing investment stories to dictate your asset allocation decisions.
Photo credit: Flickr.com – Wootang01