Amid a tenuous global economic landscape, growth opportunities are likely to be at a premium. The immense upside prospects and realized alpha of micro caps make these high-growth companies at early stages of development potentially attractive investments for asset owners.

The Micro Cap Opportunity

Interest in the vast and underexplored micro cap universe is expanding as investors look for differentiated sources of alpha at attractive prices:

Newer Companies

 

Information scarcity can lead to company mispricing

Higher Volatility

 

Can lead to greater opportunity for alpha

Longer Investment Horizon

 

Can smooth out the ride, minimize risk impact & maximize alpha1

The Quant Opportunity

Equity strategies that offer active management, diversification, and built-in risk mitigation can take advantage of potential opportunities in the less efficient micro cap segment:

Comprehensive

 

The micro cap universe has thousands of companies with limited information, making it virtually impossible for comprehensive coverage by fundamental analysts.

Agile

 

Quants can quickly and efficiently synthesize vast amount of noisy data to confirm its validity and identify outliers.

Systematic

 

Risk management can be embedded in portfolio construction, systematically incorporating portfolio constraints and anticipating transaction costs and trading liquidity.

The PGIM Quant Opportunity

We believe PGIM Quant’s proprietary models and comprehensive portfolio construction process are particularly effective in micro caps, which behave differently than other strategies:

Diversification

add

Diversification

While the upside potential of micro caps is immense, there’s a real risk of concentrating in too few names. We actively allocate across numerous positions, sectors, industries, and size groups to limit concentration risk and smooth the ride.

 

Risk Control

add

Risk Control

With so much volatility in micro caps, risk control is critical. Risk management is built into our portfolio construction process and is an ongoing component of portfolio management oversight and review.

 

Experience

add

Experience

It takes an experienced hand to structure a balanced micro cap portfolio to navigate this unique and dynamic asset class. Our seasoned Quant Equity team understands the importance of diversification and risk controls but also maintains a keen awareness of the limitations of data. And we extend these tools and insights to trading, where the right relationships and expertise can help uncover potential opportunities in a liquid, but tight, trading environment.

 

Related

1Center for Research in Security Prices (CRSP) monthly data from Jan 1926 – Dec 2021