Every investor dreams of getting in on the ground floor
of small companies with the promise of extraordinary high
growth. The new mutual funds that let you live that dream
are "micro-cap" funds. They are called so because
they're looking to invest in companies lurking far below
most fund managers' radar screens. They're especially
trying to find investments too small for the growing breed
of "small-cap" funds who, despite their name,
rarely invest in companies with market capitalization
of less than $300 million.
Micro-caps invest in companies whose market capitalization
(share price times number of outstanding shares) is $5
million to $75 million. These are lesser-known firms in
their early stages of sales and profitability.
While these funds have the potential to produce sizzling
returns, they might just as easily fail. Less liquid and
more volatile than small-caps, micro-cap funds should
be considered only for long-term investment. Investors
who may need quick access to their cash should limit their
investment to less than 10% of their portfolio.
What companies do micro-caps invest in? They look for
companies with modest debt, a reasonable return on equity
and proven management performance. They also share the
risk by buying into firms where management holds a significant
amount of stock. Micro-cap managers also look for companies
in a favorable market niche, such as the digital economy
and environmental technology sectors, and stay away from
"concept stocks"-- firms with no earnings whose
stock is rising mainly on the strength of investor enthusiasm.
Willing to try? The experts advise you to research each
fund and its manager. Find an investment style that best
fits your own appetite for risk, and don't judge your
money manager too harshly if one year is bad.
By Nancy Larin, April/May 1998