My colleagues and I have in many ways and angles discussed the importance of building a balanced portfolio, as well as the type of assets that should be included. However, I don’t think that we have directly analysed the impact that size has on portfolio.

In this instance, I am not referring to the size of the portfolio; instead I am making reference to the size of the equities selected for a portfolio.

You may have seen or heard terms in the past like large cap stocks, mid cap stocks and small cap stocks. In this case “cap” refers to the capitalisation of a company, or to put it another way, the market value of a publicly listed company. This is usually calculated by multiplying the number of shares outstanding by the current price of the shares.

So, having said that, there is a difference between how large cap stocks behave versus small cap stocks. It is not that one is better than the other. However, the differences need to be understood so as to take advantage of the benefits of each to increase the performance of your portfolio.

IS BIGGER BETTER?

Large cap stocks have some very obvious advantages which I will briefly outline.

Firstly, they are generally more readily available. You call up your broker and tell them you have some interest in the stock and they give you an indication of the price and off you go! You put in your order and voila! You are the proud owner of these shares. You can now rest easy that they are very liquid, so it should be pretty easy to buy or sell these stocks.

Analysts tend to spend more time on these large cap stocks, and consequently there is just more information available on these companies. In addition, one very critical difference is that large investors are normally restricted from investing in small companies, so they have no choice but to invest in large or mid cap companies. These large companies tend to be stable/dependable and have withstood several storms (in most cases) to become as large as they are. They are also usually well established, and their names readily recognised in the market.

Many of them have attractive dividend paying policies and may be characteriSed as a “safe bet” for investors.

JAMAICAN CONTEXT

In the United States of America, a large cap stock would be defined as having a market value of more than US$10 billion! Now, I can assure you that our humble Jamaican stocks are nowhere near that type of valuation. So, the question is; how do you relate that in a Jamaican context?

Well, I wouldn’t necessarily give you a dollar figure, but the large banks and conglomerates in Jamaica would be defined as large caps for our purposes. Small caps would typically be a lot of the companies listed on the Junior Stock Exchange.

WHEN IS A SMALLER

You may have read the description for the large caps and immediately thought that it was a no-brainer and decided to stick only to them. Small cap companies are usually considered to be riskier and more volatile than their large cap counterparts. However, despite the challenges of liquidity and availability inherent in small cap stocks, there are also very real advantages.

Smaller companies may add diversification benefits to your portfolio. In Jamaica and in international markets, most investors are heavily weighted in financial companies. There are so many reasons for this, some of which are the large sizes and copious research available, not to mention the fact that it is easier for analysts to evaluate a financial company.

Some companies are at a disadvantage just because their expertise is so esoteric, meaning people may genuinely have some difficulty understanding the business model and the products. A lot of the smaller cap companies are non-financial, hence the diversification advantage.

MORE MONEY!

This is really what you wanted to hear. You can make some very attractive returns in some of these small companies.

Of course, there is no guarantee, and it may take longer to find a buyer when you are ready to sell. However, for small companies, sometimes just a small movement in the price can translate to big gains for you the investor.

In addition, small cap companies are perceived as having more growth potential than the large caps but may be less able to withstand recessions.

In summary, it still comes down to having the right mix in your portfolio. You should have a mix of large and small caps to take advantage of the benefits of both.

Of course, don’t forget the mid-caps.

You can change the mix depending on your cash needs and time horizon.

Yanique Leiba-Ebanks, CFA, FRM is the AVP, Pensions & Portfolio Investments at Sterling Asset Management. Sterling provides financial advice and instruments in US dollars and other hard currencies to the corporate, individual and institutional investor. Visit our website at www.sterling.com.jm Feedback: if you wish to have Sterling address your investment questions in upcoming articles, e-mail us at info@sterlingasset.net.jm.