ABOUT MICRO-CAPS
"Micro-caps" refers to companies with a relatively small market capitalisation, or value. Cygnet Capital defines micro-caps as ASX-listed or soon-to-list companies valued at under $200 million. This investable universe is vast, with micro-caps comprising approximately 75% of the number of companies listed on the Australian Securities Exchange#.
# As at 24/01/08.
THE BENEFITS OF MICRO-CAP INVESTING
Micro-cap securities are typically under-researched by the market and overlooked by investors. Because research is expensive, most share market analysts only cover the larger companies where greater investment banking and broking commissions can be generated. In turn, investors look for research to generate and support their investment decisions and as a result, tend to be unaware of the opportunities inherent in the micro-cap space.
US research suggests that listed companies without research trade at a 20-30% discount to "covered" stocks, which means that there are bargains to be found. There is also the potential to discover quality micro-cap businesses before they grow big enough for the rest of the market to take notice. In addition, including microcaps in an investment portfolio may increase diversification as they typically have low correlations to other equity classes.
The lack of readily available research and the unique characteristics of the micro-cap sector can make investing relatively labour intensive, which is why it's important to utilise specialists like Cygnet Capital, that have a history of successful investing, advising and capital raising in this niche market.
THE PERFORMANCE OF MICRO-CAPS
The returns from micro-caps can be spectacular. According to Bloomberg, the top 20 stocks in 2007 with a market capitalisation under $150 million returned between 297% and 1,054%. In 2007, Cygnet Capital's top performers included:
- Torrens Energy (ASX code: TEY) which was up 512.5% on 18 June 2007 from its listing in February 2007
- Northern Energy (ASX code: NEC) which reached .25 in December 2007 from a placement price of .68 in May 2007 (up 230.9%), and
- Pacrim Energy (ASX code: PRE) which peaked at .066 in December 2007 from a .016 placement in February 2007 (up 312.5%).
Cygnet Capital was the lead manager to all of these raisings^.
Cygnet Capital's investment company focused on micro-caps has achieved returns of:
- 72.88% p.a. in financial year 2006/07
- 75.08% compounded annually for the last 2 years
- 30.79% compounded annually for the last 5 years*.
In comparison, the S&P/ASX Small Ordinaries Index (which covers the 101st to 300th biggest companies on the ASX) increased by 12.8% over financial year 2006/07 and the S&P/ASX 100 (which covers the biggest 100 companies) increased by 11.9%.
^ Figures are based on the highest closing price in 2007 compared to the price at which capital was raised in 2007.
* Figures are from audited reports and are net returns after fees. Past performance is not an indicator of future performance.
