Investing in small-cap companies may have underlying advantages over investing in big companies. For one, small-cap companies may lack visibility from the broad investing community, creating a price-value mismatch. This provides investors the chance to pounce on good investments at discounted prices. Small cap companies could also be at their initial growth stage and have a much longer runway for growth.
In Singapore, the FTSE Small Cap Index represents the companies that have a market cap of between S$103 million to S$2.6 billion. There are 65 constituents in the index and another 200 companies listed in Singapore that fall within this range. Here are four things investors should know about this index.
The five best-performing index constituents
As highlighted in a recent report by the Singapore Exchange (SGX), the five best-performing index constituents were China Sunsine Chemical Holdings Ltd (SGX:CH8), BreadTalk Group Limited (SGX: CTN), Japfa Ltd (SGX: UD2), Tianjin Zhong Xin Pharmaceutical Group Ltd (SGX: T14) and Hrnetgroup Ltd (SGX: CHZ).
As of 12 July, they had year-to-date returns of 69.4%, 40.9%, 27.8%, 20.1% and 19.1% respectively. The five stocks averaged a 28.6% return over the period.
The five worst-performing index constituents
The SGX report also highlighted the five worst performers over the same period. They were Indofood Agri Resources Ltd (SGX: 5JS) (-42.3%), Thomson Medical Group Ltd (SGX: A50) (-39.5%), Courts Asia Ltd (SGX: RE2) (-36.9%), Hi-P International Ltd (SGX: H17) (-36.2%) and Yoma Strategic Holdings Ltd (SGX: Z59) (-33.3%). These five stocks averaged a negative 37.7% return over the period.
Index heavily weighted to real estate
Real estate stocks or real estate investment trusts (REITs) heavily represent the 10 stocks that make up the largest weight of the index. Nine of the ten are REITs, while one is a property developer. Together, they make up nearly 40% of the total index weight. Because of the heavy weighting on real estate investment trusts, the index boasts a relatively high trailing dividend yield of 3.8%.
Year-to-date return of the index
At the time of writing, the index was trading at 370.5 points. This represents a 40.2 point or 9.7% decline from the start of the year. The bulk of the decline is mostly due to poor performance by REITs over the last six months as a result of interest rate hike fears.
The Foolish bottom line
Investing in small-cap companies can be rewarding if we can find undervalued, unearthed gems that the broader market has not spotted.
However, there are also risks involved when investing in small-cap stocks. For one, the lack of visibility may be a double-edged sword as finding information about them may be difficult. Secondly, small-cap companies may also face higher cost of funding. Despite their obvious potential, investors should tread cautiously when dealing with small-cap companies.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended shares of SGX. Motley Fool Singapore contributor Jeremy Chia doesn’t own shares in any companies mentioned.