Small Cap PMS — High Risk, High Reward
Small cap PMS strategies invest primarily in companies ranked below 250 by market capitalisation. These businesses are less covered by institutional analysts, creating significant opportunities for skilled stock pickers. However, small caps require a minimum 7–10 year investment horizon and high risk tolerance.
- Discovery Alpha: Find businesses before institutional investors discover them
- Growth Compounding: Small caps with 30–40% earnings growth compound rapidly
- Inefficient Markets: Lower analyst coverage creates larger pricing gaps to exploit
- Management Access: Fund managers can easily meet and evaluate management
- Illiquidity Premium: Accept some illiquidity in exchange for higher returns
Small Cap Risk Management
How top small cap PMS managers manage the inherent risks:
- Maximum 8% in any single stock to limit concentration risk
- Minimum 30 stocks for sufficient diversification within small cap universe
- Liquidity threshold: Minimum 3-month ADV (Average Daily Volume) check
- Quality screen: Only companies with positive FCF and low debt considered
- Regular management meetings to track business trajectory quarterly