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Why Do Most Institutional Investors Avoid MicroCaps?

Derren Nathan, head of research at London-based broker Hybridan, recently shared an article on IRMagazine.com titled “How small caps can tackle investor prejudice.”

In the post, Nathan shared these four reasons why most institutional investors avoid microcaps;

Minimum Market Cap. “Many funds will have a minimum market cap requirement, and even where this is not an official policy, we often find that fund managers draw their own line in the sand.”

Liquidity Concerns. Many fund fear getting stuck in an illiquid holding.

Corporate Governance. Institutional funds are concerned with poor levels of corporate governance and disclosure among microcaps, “a perception reinforced by high profile corporate scandals.”

Materiality. According to Nathan, no matter the size of investment, fund managers must perform a similar level of due diligence for each investment. The size of microcaps compared to the size of most institutions means a meaningful investment cannot be made.

Why else do you think many institutional investors avoid microcaps? Tell us in the comments or on twitter and linkedin. 

Read the entire article on IRMagazine.com HERE.