If you’re thinking about diversifying your investments, you may want to put some of your money into a smallcap fund. This investment vehicle usually holds securities of publicly traded companies with market caps between $100 million and $2 billion. This type of fund is actively managed and focuses on high-quality businesses that have the potential for lucrative returns in the future.
Disconnected Valuation
Investing in a smallcap fund may provide you with the ability to make a higher return than you would by putting money into a large-cap fund. Smaller companies often lack visibility in the investment world, which allows their value to become disconnected. When their fundamentals and stock price have a discrepancy, there is potential for a rising value once the disconnect is discovered.
Lack of Coverage by Analysts
Small-cap companies often operate under the radar of analysts as there isn’t as much coverage of this group. This divergence allows for the potential to invest in companies with excellent fundamentals, which still hasn’t been perceived by analysts who cover the sector. Once one or more analysts determine the need to raise their rating on a company’s stock price, it can help increase its value.
Acquisitions
Smaller companies are often the target of large companies that may want to acquire them. If a larger company feels like a small company could help the larger company grow stronger, they may want to offer a premium to buy the small-cap company. This acquisition usually results in a higher price for shareholders, which would be reflected in the value of a fund that is holding shares of the company. If you’d like to take advantage of this type of investment, be sure to visit Westwood Wealth Management to learn more.
