Speaking to InvestorDaily, Hyperion chief investment officer Mark Arnold said that looking over the longer term, small and medium caps are better placed to realise their growth potential then some larger companies.
“It really is a function of their size relative to their addressable market over the longer term, so the smaller companies have more growth potential over the long term,” Mr Arnold said.
“We think it’s an effective way of outperforming the market over the longer term because the market tends to be focused more on long-term issues, so it creates mispricing opportunities if you’re prepared to look out further.”
Despite this positive long-term growth potential, Mr Arnold said that often investors are hesitant to use small and medium caps in their portfolios.
“I think mum and dad investors probably tend to stick to the blue chips largely as core holdings, and then maybe they’ll look at smaller companies just as a small part of their portfolio,” he said.
Mr Arnold said that Hyperion looks for two factors when identifying small and medium-sized companies likely to outperform the market: a sustainable competitive advantage and being capital light.
“We start by assessing a company’s addressable market over a 10-year period, which means looking at the sector as a whole,” Mr Arnold said.
“If the sector is growing and the company is small relative to the market, it has higher organic growth potential, and that means better returns over time.”
