When many investors think of microcap stocks, they envision high growth stocks that are like rockets. They soar when times are good, and crash and burn when times are bad. We recently caught up with Oliver Wong, portfolio manager, Franklin MicroCap Value Fund. He explained his approach to finding higher-quality, smaller companies within the equity universe that have the potential to perform well in different market environments.

You are a portfolio manager of the Franklin MicroCap Value Fund. What’s so interesting about microcap stocks?

We define microcap stocks as having market capitalizations below $500 million. We believe this niche asset class deserves a role in many equity investors’ portfolios for two main reasons.

First, US microcap stocks, as measured by the Russell Microcap Index, have provided strong absolute returns since 2000, outperforming their large-cap peers in the Russell 1000 Index.1

Second, microcap stocks tend to be an under-researched area, which increases the odds of discovering good companies at great prices. This is because larger-cap stocks dominate the overwhelming majority of US equity trading. As a result, the brokerage firms orient their research capabilities in that direction, leaving the microcap space largely unattended.

As active microcap managers, we scour this vast investment universe of under-researched stocks looking for good companies that have been ignored, overlooked or temporarily beaten up. We believe the fact that most institutional money managers aren’t even looking in the microcap space allows us to find stocks that offer superior performance potential over the long term.