The Case for MicroCaps and Why We're in the Early Innings of a New Cycle with Doug Porter
Summary
Micro Caps: The guest makes a comprehensive case for micro caps, citing structural inefficiencies, broad neglect by large institutions, and historical outperformance across most rolling 30-year periods.
Stable Operators: He highlights cash-generating, niche, well-run micro cap businesses as overlooked and compelling, noting they were left behind amid AI and meme-driven rallies.
Global Micro Cap: Opportunity extends beyond the U.S., with a vast universe across developed and emerging markets offering diversification and discovery potential.
Active Management: Skilled, process-driven micro cap managers can avoid the riskiest names and have historically generated meaningful excess returns over passive approaches.
Portfolio Construction: Micro caps offer lower correlations to large caps, enhancing diversification; catalysts include M&A premiums, interest rate shifts, and policy changes.
Market Outlook: The guest believes we’re early in a new cycle favoring smaller companies, with extended valuation dispersion supporting multi-year opportunity.
Private Equity Alternative: Micro caps can serve as a liquid, lower-fee proxy to private equity with comparable long-term return potential and added M&A upside.
Companies/Tickers: No specific public companies or tickers were pitched; the discussion focused on the micro cap asset class and manager selection.
Transcript
This podcast is forformational purposes only and is not an offer or solicitation of an offer to buy or sell securities. SNN network, SNN Inc. and the Plano Microcap podcast and the representatives are not licensed brokers, broker dealers, market makers, investment bankers, investment adviserss, analysts, or underwriters. We do not recommend any companies [music] discussed. We may buy and sell securities in any company mentioned and make profit in the event those securities rise in value. We recommend you consult with a professional investment advisor, broker, or legal counsel before purchasing or selling any securities referenced in this podcast. [music] Welcome to the Planet Micro Cap podcast. I'm your host, Robert Craft. Thank you all so much for tuning in and for the continued support. If you like what you hear on the Planet Microap podcast, please take a moment to rate us five stars on Spotify or Apple Podcast. It really helps more folks discover the show and join the Micro Cap investing community. First off, thank you to everyone who joined us at the Planet Micro Cap Showcase Toronto in partnership with the Micro Cap Club. This was just an incredible event celebrating the best of the Micro Cap community, not only in Canada, but all of North America and maybe just globally. Um, so just truly thank you all. That was just we had so much fun. I think talking almost to a person, everybody uh really it sounds like got a lot out of it and we're just it's just so fun meeting all of you in person or as many of you as possible. So uh thank you again for all of your support, every single one of you. We're actually already gearing up for our next big investor conference, the Planet Micro Cap Showcase Vegas in partnership with Micro Cap Club 2026 happening June 16th through 18, 2026 at the Bellagio. You will want to be there. I'll be sharing more information as we go on here and uh I'll see you in Vegas. Now, my guest on the show today is Doug Porter, portfolio manager and senior research analyst at Acuitas Investments. Doug and his team recently published a new white paper titled The Case for Micro Cap. For most of you listening in, you're already a diehard micro capper and we've all succumbed to the alter and the merits of hunting in inefficient markets. Having said that, I invited Doug on here to not only remind us why we are here, why we hunt for the best investment ideas in our neck of the woods, but more importantly in in my opinion to showcase why in 2025 the case for investing in micro caps has merit as a place to build wealth and allocate capital. Though breaks down the structural inefficiencies and long-term opportunity in the micro cap equity markets, a segment that remains largely ignored by big institutions, but continues to be fertile ground for alpha generation. We discussed why micro caps have historically outperformed in 84% of rolling 30-year periods, the critical role of active management in filtering out the riskiest names, and why Doug believes we're in the early innings of a new cycle that favors smaller companies. Doug also explains how stable operators, profitable cash generating niche businesses are among the most compelling yet overlooked opportunities in today's market and why a dedicated micro cap allocation can offer diversification, M&A upside, and even a liquid alternative to private equity. Finally, we cover AQAS's approach to identifying skill micro cap managers across the globe and how this ecosystem of small research-driven funds continues to uncover value where few others are looking. [snorts] Thank you again for tuning in to the Plano Micro Cap podcast and please enjoy my conversation with Doug Porter. >> Doug, thanks for joining me today. How you doing, man? >> Uh, thank you, Robert. Yeah, I'm well and I appreciate just the opportunity to come on to your show. No, listen, you're you're family. Let's go. Let's talk about this. You know, we've known each other a long time. You know, you know, we we love AUAS and and so look, I I saw you put out this white paper um you know, I think it was Yeah, I guess it was a few weeks ago now. Um and it's pretty much an update uh from AUAS on the case for Micro Cap. And you know, I'm I have my base questions that I want to ask based on actually everything that was written up. But I thought I'd start off because you know, look, this is Micro Cap podcast. People who are listening here for the most part are like, you know, yes, we agree the case for Micro Cap. Duh. That's why we're here, you know. So in your opinion, what do you think is has been missing from these types of white papers or these types of thought pieces about like what what is it about micro cap that's still just not cutting through that like all right we need to keep updating this and keep reminding people that you know there is a case for why you should be looking at micro caps. Yeah, it's a great question and it's saying one of those things where especially since we haven't had a period [clears throat] where small micro caps uh led on an extended basis for a while. I think often times those folks there's those folks like us that are in the space and deep in the space but I think sometimes it's just nice to step back for a second and talk about just some of the basics of why we're investing in this in this area of the market. why it's so interesting because for most it's overlooked and just to remind folks of kind of the building blocks of why investing in the space and what it means over a long-term basis. So really from a an asset allocation basis for your just your regular investor that's looking to you know uh improve their opportunity in the forward in terms of uh increasing their retirement income >> 100%. I mean it also it comes at an interesting time where you know there's there's been some frothiness right? Yeah, absolutely. >> Some weird interesting trends, you know, that remind me of things, you know, leave it at that, right? So, it is kind of I I I definitely see that perspective of like, hey, yeah, there's some weird frothiness going on. It's kind of nice to, >> you know, let's go back to the B. Let's make sure like we're not let's not over, you know, let's not get caught up in any of these, you know, weird hype trends or anything like that. like let's remember why you know what what our core is and what we're really looking for. Was that part of it as well? >> Yeah, absolutely. The other thing is that it's going to get more attention as we see small micro cap this year to date uh leading uh large caps uh specifically in the US where it's been a long time since that's been the case. there's going to be more people looking at the space and then recognizing and then coming back and just looking at some of the long-term drivers of return again as they're kind of reorienting reorienting themselves uh to the market. >> Very good. All right. So, you know, I want to start with the big picture, you know, with the paper, you know, why do you think micro cap stocks still do remain one of the most neglected areas of the US either that neglect actually create opportunity in your opinion? Yeah, it's a great it's a great question and it's kind of the the basics here, you know, as uh as we can appreciate you have larger asset bases and to be able to invest in some of these smaller parts of the market um it it becomes challenging from a liquidity standpoint and also even just as we think about it in terms of professional investors in terms of their ability to manage a business. So being a big business business you have to essentially you get pressured from a business standpoint to scale your products so that they make sense from a business standpoint. Uh that size and the asset base associated with that is becomes really difficult in areas like micro cap and even we think about it from uh the cell side and writing research reports on small companies. Uh often times those get overlooked for reasons related to just the size of the business that they can do. So that your your coverage kind of moves ultimately just moves up cap, your products move up cap and these areas as a result that's why they're so interesting especially for really focused dedicated uh investment strategies. >> You also made the point that large institutions tend to avoid micro caps because they can't move the profitability needle. How has that shaped some of the inefficiencies that we see today and why do they still persist? Yeah. So, uh since since they can't invest in that space, you also it's as I mentioned before, you don't you don't get as many eyeballs, you don't get as much research written uh on the space. So, ultimately what you end up getting is you have fewer institutional investors overall in those spaces. So, you know, an area like micro cap um I mean you have a significant portion of the universe that is uh retail oriented or maybe just part-time investor oriented. So as a result you have more potential for mispricing you know ultimately because you just don't have really focused uh dedicated effort in terms of institutional investor that's getting paid to generate returns investing in that space. So ultimately the size of of the mispricings and also even just the degree to which information moves in the market. So something new comes out at a company uh that that information being disseminated across the market it is the time gap is is longer. So ultimately you have more opportunity to make money. You know it, you know what's funny is like you you know you going through the the paper and you know I have a number of other questions but you know you could put this paper 10 years ago and I'd say most of this is probably exactly the same you know >> absolutely [clears throat] no >> I I mean just bigger picture why why why is nothing changed you know I I'm trying you know we're trying to plan you know like we're trying to raise you know bring bring uh you know some more awareness to the space and how there's really great opportunity. But I mean, does it is does this keep happening because there's just I guess you'd say so much whether it just the history of how micro cap penny stock has been perceived layered in with some of these hype cycles that always get just absolut you know it's always micro cap that kind of like just kind of takes it farther than it should you know in many ways like I just why why is has nothing changed in your opinion? Yeah, I I think part of it even just within the last 10 to 15 years, you have had this move of the bigger firms have grown a lot bigger and you're uh so you have a lot more of the capital that's moved to the to the larger firms and those firms by nature as we've talked about they have to do bigger things. So the case for them running money down in the less efficient uh less liquid frankly parts of the market is more difficult. So then they naturally tend to move up caps. you just don't have as much uh you don't have as still you still still have as many people investing in the space with a real focus. Um so those lessons uh they haven't changed. They aren't likely to change uh which makes it such an interesting area for the few investors that really want to focus their time and align themselves in this part of the market. And then the other thing related to that is just being able to roll up the sleeves and really spend the time and going to the Planet Micro Cap conference and talking to companies and really getting to know the companies that takes a lot of effort and by nature of the effort uh you have to get more focused uh investors and more focused investment firms. I even even for the part and I tell this to a lot of investors that come to our events for the first time, you know, and and look, it's not trying to just be like self- serving, you know, companies are coming to the whatever is like you got to get the you got to get the reps in. Like if there was one thing I learned the most in for for in micro cap investing and all that and granted it's my job is you know being in the media and whatnot has been talking to management and doing as many of these interviews as possible and just being able to kind of get a feel for who who these management teams are and and you know how they speak and you know just knowing the right questions to ask like it's it's I try and I try my best to show people it's really not that hard, you know, like you can kind of tell a artist from from someone that isn't. It's really quite easy. Um, but then also it's sometimes not. I guess there's some that are pretty good. other point I think about is the effort that it takes and you know the cost that it takes to go out and actually do the work and do the work well especially in a day and age where in a in an industry where fees are generally coming down and where we have also technology and more distraction just the the real dedicated effort associated with that it just it takes so much more work and the I guess the incentive to actually try to do more and do more things and spread yourselves out thinner um that is kind of driving also some of the uh interest away from areas that are less liquid and um ultimately just takes the person that's really focused and dedicated into the space that really wants to do the work and generate what we always talk about which is the edge the perspective uh over some of the money that's sloshing through there that might be a little bit more emotional might be looking at charts not really understanding the story that edge we see and historically we see that in excess returns uh for micro cap strategies. I mean, excess returns historically have been 3 to 4%. And that doesn't uh and that is on average. So, if you get an even more focused low assetbased manager that can invest in the really interesting part of the market that is less liquid, um we we've seen managers that have uh been able to generate returns well in excess of those averages. >> 100%. So, I mean, look, despite the strong long-term track record, many investors do still see micro caps as risk too risky. you kind of hit on that main point, but how do you really how do you respond to that perception though still like even amongst you know there you somebody could be looking at a swath of you know 10 really interesting what we know because we've been doing them for a while like quality names and still see them still might be too risky and what does the data actually show? >> Yeah, it's a it's it's a great question actually. Even very uh well-resourced, capable allocators uh bring up this question and have these debates. And the one thing that we always want to point out to people is oftent times that analysis that highlights the risk is looking at the entire universe of stocks. And we know within that universe of stocks, there's a section of that stock universe that's it's not well invested in uh for good reasons. They're unprofitable companies with high levels of debt. they drive a lot of the volatility and most active managers avoid those types of stocks. So our point being your active portfolio generally has less lower levels of risks than if you were looking at that historically and looking at the entire universe. Excuse me. So you you're getting the returns but you're actually getting a lot less risk. >> Absolutely. So I mean the paper notes that micro caps have historically outperformed large caps in 84% of rolling 30-year periods. What would you say explains that consistency and what drives the returns during the other 16%. >> Yeah, it's you know we we always think about the the paper as uh the FMA French paper. So it's was published in 1992. Really what it pointed out was the price anomalies. So it is associated with smaller and cheaper stocks and that is over we we took a look at that and that's often times called the small cap effect but what we'd say is it's actually the micro cap effect. If you look at the micro cap index in those bottom in the bottom three deciles over 90% of the micro cap index represents that smaller uh part of the market whereas the small cap index only it's only about a quarter of the uh of the index actually represents that small cap effect. So this is something that's and if you look at that if you look at that uh that part of the market that smaller cheaper part of the market uh what we'd call micro cap uh like you mentioned o over time it it outperforms the larger stocks and it's it's related to just being overlooked and underappreciated. So there's a valuation case for that and there's also just a case of just not having as many eyeballs on it. >> You also describe four categories of micro cap companies. stable operators, fallen angels, emerging growth, and story stocks. Which of those segments looks most compelling right now? >> Oh, I uh I mean given given the runup, I mean, you you alluded to this a little bit earlier. I mean, you get these periods and actually Chris Desson uh my colleague recently wrote a paper on this. It's also available on our website within our white papers. It's just you get these periods where you get a lot of theme-based uh theme-based uh investment moves. So a lot of the leadership being driven by you know AI AI related infrastructure we'd call these oftent times when you get some of this leadership story stocks even some of the meme stocks those kinds of stocks can drive have driven uh the market ahead where some of the more interesting stocks and these are the ones that are really overlooked uh probably the most overlooked right now and and the part of the micro cap that isn't typically associated by your average investor is we'd call them stable operators. These are companies that are generating consistent cash flow, profitability, uh, but they're small because they're usually it's because they just address a small part of the market. So, they're not they're not going to be big companies, but they're very well-run companies. And those have largely been left behind. So, those are I'd say some of the mo most interesting things that we've been seeing or at least been seeing it through the lens of the managers that we research. >> Absolutely. So, active management seems to be a big theme here as well. You know, you mentioned microc managers have averaged more than 450 basis points of annualized excess returns over the past decade. What gives skilled managers such an edge in this space? It seems >> I've a great question. Yeah. >> Yeah. It seems painfully obvious probably to some most of the folks that are listening here, but I you know it's important to to understand that and for those that think they can just be a passive micro cap investor, that's really why I'm asking this question. >> Yeah, I one of the things that we emphasize at Acuis is having an approach. So having something that's uh it's grounded in what has worked historically in terms of what kind of characteristics you can associate it with good companies that are going to outperform. So the the focused manager has an approach. They have a process around that approach that keeps the emotions at least limited. So in the sense of they know exactly the kinds of companies and the characteristics of companies that they're trying to target. they're doing the work on those companies to generate some edge and for and they're very consistent in their approach and uh and I'd say also aware of how they can make some uh mistakes in terms of how they invest. I'd say that kind of effort uh is a has a huge advantage over a more of a maybe a part-time investor that is kind of just maybe reading the headlines and then potential to have a little bit more of an emotionally based response to what they're seeing in the market on a day-to-day basis. >> Very good. So I mean liquidity and capacity are often cited as barriers for larger investors. How does think about fund size, position sizing and liquidity when investing in micro caps? Yeah, we we we try to think about every there's a number of different ways to uh approach the market. So, a number of different what we'd say a number of different ways to win. So, and I think it's what's really important to note is that it depends upon your approach. If your approach requires very quick buying and selling and you're typically and maybe some of these stocks that have lots of momentum and lots of really uh kind of high [clears throat] turnover investors alongside you, you are generally not want do not want to manage as much money versus maybe a manager that's much more patient looking at low valuation quality of company that has generally lower turnover. they can I'd say on a just on a uh a basic basis just man they can generally manage a little bit more money. So we think about it at the product level. So then also is a function of how many holdings do you have. So if um if you have 10 holdings it's going to be quite different than if you're investing with 60 holdings. So uh I I'd say though generically we'd say 250 to 500 million's a a uh kind of ballpark of where we typically see uh uh capacity for a strategy. But it does depend upon the resources you're and and your approach to uh to stock selection. >> Absolutely. I'm going to come back to you in a little bit on uh you know your assessing managers and stuff like that, but I I'll come to that in a sec. You know, another point that uh you make is that most small cap funds actually tend to lean more towards midcaps. How one that just I mean yes I'm seeing the same thing too but like how underexposed are investors then to true micro caps today when you're kind of seeing this trend of you know we're small cap but you know >> yeah we look at companies that are you know four billion of market cap for sure >> I I think you're the timing of your question is actually really great especially coming off our previous comment where if you're trying to build a business case for your product uh one of the ways to manage more money is to manage in larger stocks that are more liquid. So, uh I think the business cases part of the reason why managers tend to gravitate upwards. Then there's also, you know, things like uh just getting comfortable with the companies you own and those generally growing over time and maybe you're not doing as great a job of sourcing down the market cap spectrum. The average small cap strategy uh has about 20% exposure on average uh to stocks under 1.5 billion in in uh market cap. That's what we'd say is uh not getting you the exposure that you're uh you would intend if as someone who's looking for those smaller cheaper companies whereas your micro cap strategy is giving you I think it's over 80% on average exposure to those uh to those types of companies that are under 1.5 billion in market cap. But some of it's related to the business, some of it's related to over time just getting comfortable with stocks. Some of it's related to um just uh doing other things. And so oftent times a good small cap investor who builds their record in micro cap the assets grow they have to move up for liquidity reasons and then they start to you know one of the typical moves for a small cap manager is start to manage a small midcap strategy. So just by virtue of you having to extend your uh research coverage up the market cap that's taking away from the really interesting part of the market especially since you can't own as much of them when your business grows. You also highlight the diversification benefits. You know the that micro caps move differently from the rest of the market with much lower correlations to large caps. How does that translate into better portfolio construction? >> Yeah. So you you get a uh with lower correlations you can ultimately just diversify your risk away. So and also related within the micro cap market you have lower correlation between companies. So you can own fewer companies and you get you diversify away more of the stock specific risk uh just with fewer companies. So it's from an asset allocation point of view especially when you think about the active return opportunity if you can uh historically 3 to 4% uh upon an area of the market which over the long-term time period over a 75 year period as you mentioned before that outperforms at larger companies that could be a compelling case from an asset allocation point of view. the the paper also compares micro cap investing to private equity, higher return potential, earlier stage companies uh both with better liquidity and lower fees. Can you expand on that comparison? >> Yeah, and we actually wrote it and I I will highlight my my colleague Matt Neman uh wrote a paper on this and I believe it was 2020 or 2021. So the just the case for public uh public equities as a proxy for private equity you get uh really interesting upside opportunities but then you also get it daily priced. Uh so we think that especially when you think about uh private equity in an unlevered basis versus public equity in a longonly basis that the returns over time are comparable and there's also the premium associated with uh M&A activity in uh in micro caps. So it's a historically what we've seen is uh a decent amount of M&A activity and you also get generally larger premiums for smaller companies versus M&A activity up the market cap spectrum. So you're uh you know paying up for a really small interesting company with interesting new technology as a larger firm. It's uh we've seen that there's just more willingness to pay up in terms of the premium over the current price. So it's uh that's that's also been contributing to the uh returns that we've seen over time in micro cap. So one one trend that we've talked about a lot amongst our colleagues and cohort here in micro cap is that you know we we get worried every single year that you know less and less quality businesses go public earlier on in their life cycles. You know they're just you know they're waiting longer. They think valuation will be more if they stay private. you know might be in some cases but as a result you know it's you know you have investors that are looking you know everywhere which maybe would have naturally happened anyway right is going to look in other countries for interesting opportunities and ideas but it's just so curious that in the US you know there's biggest most you know largest capital market system in the world and you know some of the best investors in the world that I know you know not to say they aren't looking in the US too but they're like well you know there's not as many quality businesses going public earlier on. You know, there might there's still quality here, but I know most of these days I'm tracking them. Why not go abroad and see what else is out there that has has some attractive valuations? So, love to hear your thoughts on on all of that and this current. >> Yeah. Yeah. I I would highlight uh the Micro universe is vast. I mean, we have, you know, it's about 1500 companies, I think, as of uh middle of this last year. So, it's still a very large universe uh of companies. So in the sense of it still having great opportunities in within there I think that's wonderful but we also have you have companies that come down into the space so that you have uh small cap companies or midcap companies that for whatever reason kind of we call them fallen angels come down they trip up either or their uh or their industry is out of favor. So those become opportunities and then the other thing too is I mean it it is very much we think of micro cap on a global basis. I mean, you have, and you kind of alluded to it, you have a vast universe outside the US. You have over 4,000 companies in developed markets, almost 4,000 companies uh in the developed markets in micro outside the US in micro cap and then another 3,400ish companies in emerging markets in micro cap. So, it's a it's a vast universe. uh and we do feel as if uh these these trends cycle in the sense of uh so becoming public and you know having uh reporting standards and uh daily being daily price there is value to that and uh we do see that as still a very vibrant uh part of the universe. >> Yeah, which you know we'd [clears throat] like to see more in the US. It' be nice. uh you know most other markets they make it it it's seeming you know their venture markets are a little bit more friendlier and easier to go public it's not as cost uh uh just depleting I guess uh it very much is in the US but you also mentioned catalyst that could drive a revaluation in micro caps things like M&A interest rate shifts and fiscal policy changes which of those factors feels most important in the current environment >> yeah the interest rates I mean the market has really traded on uh just potential for lower interest rates Right. So we feel like that's been one of the catalysts and you know frankly in historically what we've seen I think this is in line with history too. The first move is usually uh driven by some of the parts of the market that are a little bit more uh speculative or tied to themes. So but what we understand and appreciate being investors in micro cap over multiple market cycles is it it truly does come down to the company and the fundamentals over the full cycle. So we're excited that the markets are moving up and small and micro cap are winning. uh that the leadership of that been tough from an active management basis, but sticking to what the fundamentals that we know drive returns over a market cycle, we know that the excess returns are going to be best when people continue to focus on their approach that is u borne out through history. >> Very good. All right. So, you know, finally with regards to the white paper, you know, my my last question on that is, you know, you write that we're in the early innings of a long-term cyclical shift toward micro cap. What makes this moment particularly compelling and how should investors think about timing their entry? >> Yeah. Yeah. I' I'd say a couple things is uh in Wellington wrote a paper uh a couple years ago actually no is the end of last year uh related to just the cycles of small versus large and we dissociate that with micro cap and the cycles are usually 11 to 12 years. The cycle been longer than that 14. So, and and you think about that and then you think about the valuations uh the relative valuations between micro cap and large cap they've been particularly extended and you've had such a long time period. I think we have a generation of analysts in the industry that haven't seen a true micro cap micro small cap leadership. So, when you get eyeballs on a space that is then now turning I think the power of that move just given the valuation disparity is incredible. So, I think that's one of the particularly interesting parts of uh where we're at in the market and even as as much as we've seen the leadership thus far this year, it still feels like it's very early in even especially when you look at valuation disparity. >> 100%. So, Doug, my final question then for you here today, it's specific to AQAS. You know, for those that don't know AQAS, you guys are fund of funds. You guys um provide capital to uh micro cap fund man active micro cap fund managers. you guys have a very thorough thorough approach. You know, I've talked to many managers that have talked with you, you know, everyone's like, I love Doug, you know, everything like that and and Chris and the whole team, but at the same time, they're also like, man, they take a long time, you know, for for all that. So like how one I understand why a you know look you want to make sure you're you know you're deploying your capital you know correctly efficiently you know you got to do all your channel checks and everything like that but how do you weigh the all right this is our process to yes we take a long time but also potentially missing out on a talented manager that might have just had a bad year or a bad quarter or something like that and you're like all right well now we're not you know I just I'm I'm trying I'm just I've been want to ask you that for a while based on some of the feedback are we getting? >> Yeah, we we love to get to know our investors and and see them work uh in the specific buying and selling of their portfolio. Sometimes we can move quickly with the benefit also of knowing them from previous firms or kind of knowing their background or being able to see some of their background. But I mean, one of the things that we hold ourselves a high standard to with us is just making sure that we fully understand their approach, not only their approach to investing, but also how they manage their business and the the infrastructure that they set up. and then also what the future looks like that they understand some of the issues that they're going to end up running into especially as they grow. I mean it's um it the world changes as an uh as a strategy grows in assets as a business becomes more successful. So there's a there's we want to make sure that we understand every aspect. we can move quickly and we have moved quickly uh to invest early but that takes as you've noted we just we want to have lots of uh discussions and evaluation and analysis and we uh we pride ourselves in working with uh products at a small asset base and most often times that leads us to small firms. So, in the in the sense of also being able to be a resource to those folks, they're really that we appreciate that they're dedicated to the space, but also that they're they are also going to want some uh perspective on what the future is going to look like as an organization, especially as they kind of hit new milestones in terms of the business growing and being able to add people and other add other elements to their business as they need. Uh we also want to be [snorts] that resource to the managers so that they're as successful as possible and ultimately with the hope that their their success is directly tied to our clients as they are in one of our client portfolios. >> 100%. So what's been most interesting right now and I mean I I don't know how often you guys think I mean I know you have your discipline approach of what you're looking for and you know obviously taking the time want to get to know them so that in any industry any time period you feel comfortable in allocating that capital to that manager. But what's been most interesting right now? I mean, has there been any, you know, ideas or strategies that have been more specific to one sector that you've been finding interesting? Or have there been any strategies that, you know, have a interesting trading option style? I don't know. You know, I'd love to hear what what's been most interesting right now. >> Yeah. I I think of a couple things. I first and foremost, the manager that's truly diving into the most obscure part of the market and finding the gems. That's always interesting and that that never changes. and and and frankly as the pressure gets more intense on the smaller firms as the bigger firms continue to take more of the market share um finding those that are really doing that is always uh tremendous and it and there's more pressure to look like the other larger manager uh so those that are truly staying away from that and focusing on what what's going to drive uh returns I think that's that's always interesting to us I'd say on the other side too is just data Uh so you see a lot of and you you I'm sure you see this too where you said a lot more quantitatively oriented investment strategies. So those folks that are able to find interesting new information from frankly now what they can create data sets um and evaluate companies from a number of different aspects and then also just value the whole universe simultaneously and the speed with which they can do that that's been incredibly interesting and also uh working in the ecosystem even if I'm not a quantitative manager but I understand those that are investing alongside me and why they are making buy to sell decisions related to their approach. I think understanding that ecosystem and those uh those return drivers uh and how that's evolving. There's been a lot of quantitatively oriented money that's moved into the micro cap space cuz it's a really interesting asset class, but also related to that, there are drivers of those types of processes that people need to be aware of. >> 100%. Well, Doug, I we we've covered a lot today. covered the putt white paper, why you guys wrote it, why you updated it? Um, you know, and the message is still clear that there is a case for micro caps. But, um, real quick, final thoughts, anything you want to leave us with with regard to micro cap investing, you know, rest 25 going to 26, you know, what what's been what else has been on your mind? >> Oh, I did I just I just want to appreciate uh your business, Robert, and what you do and providing a forum for dedicated micro cap investors to assess management teams and then also collaborate with each other. I think that is of >> thank you >> of high value and increasing value especially as we get to a a place where there's just more distraction and also just the uh more uh pressure from the big businesses that are uh trying people having people focus on bigger things. So say that and then also just uh we want to be a resource to the community. So, if you're a micro cap investor that's out there, uh if you haven't reached out and talked to us at Audus, we'd invite you to reach out to us via email or if you're out this way in the Seattle area, please uh stop by. Um and two, it doesn't you don't have to have a setup business. If you're someone that's thinking about setting up a business, we'd love to be a resource to you just to give you some perspective on the things that we see and the things that we've learned over the years uh working with small businesses. So, we think it's one of the most interesting areas of the market in terms of the opportunity and like you mentioned, Robert, we'd hope that more really passionate investors uh that want to manage money for people and the and that and generating returns that they would come to this space cuz um it is one of the most interesting spaces and one of the few spaces left where you have the potential to generate an edge on the consensus. >> Man, that a beautiful way of ending it. Nice. Nice work, dude. Well, uh, Doug, always a pleasure. Thank you for joining us today. Uh, real quick, the website it's aqatas.com, right? >> Yeah, www.qudisinvestments.com. We have a white paper section we've written. I mentioned the case for micro cap. We also have a case for international small micro cap, a number of different uh elements from an academic basis on micro cap. So, yeah, happy to be a and if if you don't see it there, uh, please reach out and ask us the question. So, always happy to write on uh items related to micro cap. Very cool, Doug. Again, thank you very much for joining me today. Really do appreciate it. Good luck. Stay safe and I look forward to our next conversation. >> Thank you, Robert. Take care. >> Bye. [music] [music] [music]
The Case for MicroCaps and Why We're in the Early Innings of a New Cycle with Doug Porter
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This podcast is forformational purposes only and is not an offer or solicitation of an offer to buy or sell securities. SNN network, SNN Inc. and the Plano Microcap podcast and the representatives are not licensed brokers, broker dealers, market makers, investment bankers, investment adviserss, analysts, or underwriters. We do not recommend any companies [music] discussed. We may buy and sell securities in any company mentioned and make profit in the event those securities rise in value. We recommend you consult with a professional investment advisor, broker, or legal counsel before purchasing or selling any securities referenced in this podcast. [music] Welcome to the Planet Micro Cap podcast. I'm your host, Robert Craft. Thank you all so much for tuning in and for the continued support. If you like what you hear on the Planet Microap podcast, please take a moment to rate us five stars on Spotify or Apple Podcast. It really helps more folks discover the show and join the Micro Cap investing community. First off, thank you to everyone who joined us at the Planet Micro Cap Showcase Toronto in partnership with the Micro Cap Club. This was just an incredible event celebrating the best of the Micro Cap community, not only in Canada, but all of North America and maybe just globally. Um, so just truly thank you all. That was just we had so much fun. I think talking almost to a person, everybody uh really it sounds like got a lot out of it and we're just it's just so fun meeting all of you in person or as many of you as possible. So uh thank you again for all of your support, every single one of you. We're actually already gearing up for our next big investor conference, the Planet Micro Cap Showcase Vegas in partnership with Micro Cap Club 2026 happening June 16th through 18, 2026 at the Bellagio. You will want to be there. I'll be sharing more information as we go on here and uh I'll see you in Vegas. Now, my guest on the show today is Doug Porter, portfolio manager and senior research analyst at Acuitas Investments. Doug and his team recently published a new white paper titled The Case for Micro Cap. For most of you listening in, you're already a diehard micro capper and we've all succumbed to the alter and the merits of hunting in inefficient markets. Having said that, I invited Doug on here to not only remind us why we are here, why we hunt for the best investment ideas in our neck of the woods, but more importantly in in my opinion to showcase why in 2025 the case for investing in micro caps has merit as a place to build wealth and allocate capital. Though breaks down the structural inefficiencies and long-term opportunity in the micro cap equity markets, a segment that remains largely ignored by big institutions, but continues to be fertile ground for alpha generation. We discussed why micro caps have historically outperformed in 84% of rolling 30-year periods, the critical role of active management in filtering out the riskiest names, and why Doug believes we're in the early innings of a new cycle that favors smaller companies. Doug also explains how stable operators, profitable cash generating niche businesses are among the most compelling yet overlooked opportunities in today's market and why a dedicated micro cap allocation can offer diversification, M&A upside, and even a liquid alternative to private equity. Finally, we cover AQAS's approach to identifying skill micro cap managers across the globe and how this ecosystem of small research-driven funds continues to uncover value where few others are looking. [snorts] Thank you again for tuning in to the Plano Micro Cap podcast and please enjoy my conversation with Doug Porter. >> Doug, thanks for joining me today. How you doing, man? >> Uh, thank you, Robert. Yeah, I'm well and I appreciate just the opportunity to come on to your show. No, listen, you're you're family. Let's go. Let's talk about this. You know, we've known each other a long time. You know, you know, we we love AUAS and and so look, I I saw you put out this white paper um you know, I think it was Yeah, I guess it was a few weeks ago now. Um and it's pretty much an update uh from AUAS on the case for Micro Cap. And you know, I'm I have my base questions that I want to ask based on actually everything that was written up. But I thought I'd start off because you know, look, this is Micro Cap podcast. People who are listening here for the most part are like, you know, yes, we agree the case for Micro Cap. Duh. That's why we're here, you know. So in your opinion, what do you think is has been missing from these types of white papers or these types of thought pieces about like what what is it about micro cap that's still just not cutting through that like all right we need to keep updating this and keep reminding people that you know there is a case for why you should be looking at micro caps. Yeah, it's a great question and it's saying one of those things where especially since we haven't had a period [clears throat] where small micro caps uh led on an extended basis for a while. I think often times those folks there's those folks like us that are in the space and deep in the space but I think sometimes it's just nice to step back for a second and talk about just some of the basics of why we're investing in this in this area of the market. why it's so interesting because for most it's overlooked and just to remind folks of kind of the building blocks of why investing in the space and what it means over a long-term basis. So really from a an asset allocation basis for your just your regular investor that's looking to you know uh improve their opportunity in the forward in terms of uh increasing their retirement income >> 100%. I mean it also it comes at an interesting time where you know there's there's been some frothiness right? Yeah, absolutely. >> Some weird interesting trends, you know, that remind me of things, you know, leave it at that, right? So, it is kind of I I I definitely see that perspective of like, hey, yeah, there's some weird frothiness going on. It's kind of nice to, >> you know, let's go back to the B. Let's make sure like we're not let's not over, you know, let's not get caught up in any of these, you know, weird hype trends or anything like that. like let's remember why you know what what our core is and what we're really looking for. Was that part of it as well? >> Yeah, absolutely. The other thing is that it's going to get more attention as we see small micro cap this year to date uh leading uh large caps uh specifically in the US where it's been a long time since that's been the case. there's going to be more people looking at the space and then recognizing and then coming back and just looking at some of the long-term drivers of return again as they're kind of reorienting reorienting themselves uh to the market. >> Very good. All right. So, you know, I want to start with the big picture, you know, with the paper, you know, why do you think micro cap stocks still do remain one of the most neglected areas of the US either that neglect actually create opportunity in your opinion? Yeah, it's a great it's a great question and it's kind of the the basics here, you know, as uh as we can appreciate you have larger asset bases and to be able to invest in some of these smaller parts of the market um it it becomes challenging from a liquidity standpoint and also even just as we think about it in terms of professional investors in terms of their ability to manage a business. So being a big business business you have to essentially you get pressured from a business standpoint to scale your products so that they make sense from a business standpoint. Uh that size and the asset base associated with that is becomes really difficult in areas like micro cap and even we think about it from uh the cell side and writing research reports on small companies. Uh often times those get overlooked for reasons related to just the size of the business that they can do. So that your your coverage kind of moves ultimately just moves up cap, your products move up cap and these areas as a result that's why they're so interesting especially for really focused dedicated uh investment strategies. >> You also made the point that large institutions tend to avoid micro caps because they can't move the profitability needle. How has that shaped some of the inefficiencies that we see today and why do they still persist? Yeah. So, uh since since they can't invest in that space, you also it's as I mentioned before, you don't you don't get as many eyeballs, you don't get as much research written uh on the space. So, ultimately what you end up getting is you have fewer institutional investors overall in those spaces. So, you know, an area like micro cap um I mean you have a significant portion of the universe that is uh retail oriented or maybe just part-time investor oriented. So as a result you have more potential for mispricing you know ultimately because you just don't have really focused uh dedicated effort in terms of institutional investor that's getting paid to generate returns investing in that space. So ultimately the size of of the mispricings and also even just the degree to which information moves in the market. So something new comes out at a company uh that that information being disseminated across the market it is the time gap is is longer. So ultimately you have more opportunity to make money. You know it, you know what's funny is like you you know you going through the the paper and you know I have a number of other questions but you know you could put this paper 10 years ago and I'd say most of this is probably exactly the same you know >> absolutely [clears throat] no >> I I mean just bigger picture why why why is nothing changed you know I I'm trying you know we're trying to plan you know like we're trying to raise you know bring bring uh you know some more awareness to the space and how there's really great opportunity. But I mean, does it is does this keep happening because there's just I guess you'd say so much whether it just the history of how micro cap penny stock has been perceived layered in with some of these hype cycles that always get just absolut you know it's always micro cap that kind of like just kind of takes it farther than it should you know in many ways like I just why why is has nothing changed in your opinion? Yeah, I I think part of it even just within the last 10 to 15 years, you have had this move of the bigger firms have grown a lot bigger and you're uh so you have a lot more of the capital that's moved to the to the larger firms and those firms by nature as we've talked about they have to do bigger things. So the case for them running money down in the less efficient uh less liquid frankly parts of the market is more difficult. So then they naturally tend to move up caps. you just don't have as much uh you don't have as still you still still have as many people investing in the space with a real focus. Um so those lessons uh they haven't changed. They aren't likely to change uh which makes it such an interesting area for the few investors that really want to focus their time and align themselves in this part of the market. And then the other thing related to that is just being able to roll up the sleeves and really spend the time and going to the Planet Micro Cap conference and talking to companies and really getting to know the companies that takes a lot of effort and by nature of the effort uh you have to get more focused uh investors and more focused investment firms. I even even for the part and I tell this to a lot of investors that come to our events for the first time, you know, and and look, it's not trying to just be like self- serving, you know, companies are coming to the whatever is like you got to get the you got to get the reps in. Like if there was one thing I learned the most in for for in micro cap investing and all that and granted it's my job is you know being in the media and whatnot has been talking to management and doing as many of these interviews as possible and just being able to kind of get a feel for who who these management teams are and and you know how they speak and you know just knowing the right questions to ask like it's it's I try and I try my best to show people it's really not that hard, you know, like you can kind of tell a artist from from someone that isn't. It's really quite easy. Um, but then also it's sometimes not. I guess there's some that are pretty good. other point I think about is the effort that it takes and you know the cost that it takes to go out and actually do the work and do the work well especially in a day and age where in a in an industry where fees are generally coming down and where we have also technology and more distraction just the the real dedicated effort associated with that it just it takes so much more work and the I guess the incentive to actually try to do more and do more things and spread yourselves out thinner um that is kind of driving also some of the uh interest away from areas that are less liquid and um ultimately just takes the person that's really focused and dedicated into the space that really wants to do the work and generate what we always talk about which is the edge the perspective uh over some of the money that's sloshing through there that might be a little bit more emotional might be looking at charts not really understanding the story that edge we see and historically we see that in excess returns uh for micro cap strategies. I mean, excess returns historically have been 3 to 4%. And that doesn't uh and that is on average. So, if you get an even more focused low assetbased manager that can invest in the really interesting part of the market that is less liquid, um we we've seen managers that have uh been able to generate returns well in excess of those averages. >> 100%. So, I mean, look, despite the strong long-term track record, many investors do still see micro caps as risk too risky. you kind of hit on that main point, but how do you really how do you respond to that perception though still like even amongst you know there you somebody could be looking at a swath of you know 10 really interesting what we know because we've been doing them for a while like quality names and still see them still might be too risky and what does the data actually show? >> Yeah, it's a it's it's a great question actually. Even very uh well-resourced, capable allocators uh bring up this question and have these debates. And the one thing that we always want to point out to people is oftent times that analysis that highlights the risk is looking at the entire universe of stocks. And we know within that universe of stocks, there's a section of that stock universe that's it's not well invested in uh for good reasons. They're unprofitable companies with high levels of debt. they drive a lot of the volatility and most active managers avoid those types of stocks. So our point being your active portfolio generally has less lower levels of risks than if you were looking at that historically and looking at the entire universe. Excuse me. So you you're getting the returns but you're actually getting a lot less risk. >> Absolutely. So I mean the paper notes that micro caps have historically outperformed large caps in 84% of rolling 30-year periods. What would you say explains that consistency and what drives the returns during the other 16%. >> Yeah, it's you know we we always think about the the paper as uh the FMA French paper. So it's was published in 1992. Really what it pointed out was the price anomalies. So it is associated with smaller and cheaper stocks and that is over we we took a look at that and that's often times called the small cap effect but what we'd say is it's actually the micro cap effect. If you look at the micro cap index in those bottom in the bottom three deciles over 90% of the micro cap index represents that smaller uh part of the market whereas the small cap index only it's only about a quarter of the uh of the index actually represents that small cap effect. So this is something that's and if you look at that if you look at that uh that part of the market that smaller cheaper part of the market uh what we'd call micro cap uh like you mentioned o over time it it outperforms the larger stocks and it's it's related to just being overlooked and underappreciated. So there's a valuation case for that and there's also just a case of just not having as many eyeballs on it. >> You also describe four categories of micro cap companies. stable operators, fallen angels, emerging growth, and story stocks. Which of those segments looks most compelling right now? >> Oh, I uh I mean given given the runup, I mean, you you alluded to this a little bit earlier. I mean, you get these periods and actually Chris Desson uh my colleague recently wrote a paper on this. It's also available on our website within our white papers. It's just you get these periods where you get a lot of theme-based uh theme-based uh investment moves. So a lot of the leadership being driven by you know AI AI related infrastructure we'd call these oftent times when you get some of this leadership story stocks even some of the meme stocks those kinds of stocks can drive have driven uh the market ahead where some of the more interesting stocks and these are the ones that are really overlooked uh probably the most overlooked right now and and the part of the micro cap that isn't typically associated by your average investor is we'd call them stable operators. These are companies that are generating consistent cash flow, profitability, uh, but they're small because they're usually it's because they just address a small part of the market. So, they're not they're not going to be big companies, but they're very well-run companies. And those have largely been left behind. So, those are I'd say some of the mo most interesting things that we've been seeing or at least been seeing it through the lens of the managers that we research. >> Absolutely. So, active management seems to be a big theme here as well. You know, you mentioned microc managers have averaged more than 450 basis points of annualized excess returns over the past decade. What gives skilled managers such an edge in this space? It seems >> I've a great question. Yeah. >> Yeah. It seems painfully obvious probably to some most of the folks that are listening here, but I you know it's important to to understand that and for those that think they can just be a passive micro cap investor, that's really why I'm asking this question. >> Yeah, I one of the things that we emphasize at Acuis is having an approach. So having something that's uh it's grounded in what has worked historically in terms of what kind of characteristics you can associate it with good companies that are going to outperform. So the the focused manager has an approach. They have a process around that approach that keeps the emotions at least limited. So in the sense of they know exactly the kinds of companies and the characteristics of companies that they're trying to target. they're doing the work on those companies to generate some edge and for and they're very consistent in their approach and uh and I'd say also aware of how they can make some uh mistakes in terms of how they invest. I'd say that kind of effort uh is a has a huge advantage over a more of a maybe a part-time investor that is kind of just maybe reading the headlines and then potential to have a little bit more of an emotionally based response to what they're seeing in the market on a day-to-day basis. >> Very good. So I mean liquidity and capacity are often cited as barriers for larger investors. How does think about fund size, position sizing and liquidity when investing in micro caps? Yeah, we we we try to think about every there's a number of different ways to uh approach the market. So, a number of different what we'd say a number of different ways to win. So, and I think it's what's really important to note is that it depends upon your approach. If your approach requires very quick buying and selling and you're typically and maybe some of these stocks that have lots of momentum and lots of really uh kind of high [clears throat] turnover investors alongside you, you are generally not want do not want to manage as much money versus maybe a manager that's much more patient looking at low valuation quality of company that has generally lower turnover. they can I'd say on a just on a uh a basic basis just man they can generally manage a little bit more money. So we think about it at the product level. So then also is a function of how many holdings do you have. So if um if you have 10 holdings it's going to be quite different than if you're investing with 60 holdings. So uh I I'd say though generically we'd say 250 to 500 million's a a uh kind of ballpark of where we typically see uh uh capacity for a strategy. But it does depend upon the resources you're and and your approach to uh to stock selection. >> Absolutely. I'm going to come back to you in a little bit on uh you know your assessing managers and stuff like that, but I I'll come to that in a sec. You know, another point that uh you make is that most small cap funds actually tend to lean more towards midcaps. How one that just I mean yes I'm seeing the same thing too but like how underexposed are investors then to true micro caps today when you're kind of seeing this trend of you know we're small cap but you know >> yeah we look at companies that are you know four billion of market cap for sure >> I I think you're the timing of your question is actually really great especially coming off our previous comment where if you're trying to build a business case for your product uh one of the ways to manage more money is to manage in larger stocks that are more liquid. So, uh I think the business cases part of the reason why managers tend to gravitate upwards. Then there's also, you know, things like uh just getting comfortable with the companies you own and those generally growing over time and maybe you're not doing as great a job of sourcing down the market cap spectrum. The average small cap strategy uh has about 20% exposure on average uh to stocks under 1.5 billion in in uh market cap. That's what we'd say is uh not getting you the exposure that you're uh you would intend if as someone who's looking for those smaller cheaper companies whereas your micro cap strategy is giving you I think it's over 80% on average exposure to those uh to those types of companies that are under 1.5 billion in market cap. But some of it's related to the business, some of it's related to over time just getting comfortable with stocks. Some of it's related to um just uh doing other things. And so oftent times a good small cap investor who builds their record in micro cap the assets grow they have to move up for liquidity reasons and then they start to you know one of the typical moves for a small cap manager is start to manage a small midcap strategy. So just by virtue of you having to extend your uh research coverage up the market cap that's taking away from the really interesting part of the market especially since you can't own as much of them when your business grows. You also highlight the diversification benefits. You know the that micro caps move differently from the rest of the market with much lower correlations to large caps. How does that translate into better portfolio construction? >> Yeah. So you you get a uh with lower correlations you can ultimately just diversify your risk away. So and also related within the micro cap market you have lower correlation between companies. So you can own fewer companies and you get you diversify away more of the stock specific risk uh just with fewer companies. So it's from an asset allocation point of view especially when you think about the active return opportunity if you can uh historically 3 to 4% uh upon an area of the market which over the long-term time period over a 75 year period as you mentioned before that outperforms at larger companies that could be a compelling case from an asset allocation point of view. the the paper also compares micro cap investing to private equity, higher return potential, earlier stage companies uh both with better liquidity and lower fees. Can you expand on that comparison? >> Yeah, and we actually wrote it and I I will highlight my my colleague Matt Neman uh wrote a paper on this and I believe it was 2020 or 2021. So the just the case for public uh public equities as a proxy for private equity you get uh really interesting upside opportunities but then you also get it daily priced. Uh so we think that especially when you think about uh private equity in an unlevered basis versus public equity in a longonly basis that the returns over time are comparable and there's also the premium associated with uh M&A activity in uh in micro caps. So it's a historically what we've seen is uh a decent amount of M&A activity and you also get generally larger premiums for smaller companies versus M&A activity up the market cap spectrum. So you're uh you know paying up for a really small interesting company with interesting new technology as a larger firm. It's uh we've seen that there's just more willingness to pay up in terms of the premium over the current price. So it's uh that's that's also been contributing to the uh returns that we've seen over time in micro cap. So one one trend that we've talked about a lot amongst our colleagues and cohort here in micro cap is that you know we we get worried every single year that you know less and less quality businesses go public earlier on in their life cycles. You know they're just you know they're waiting longer. They think valuation will be more if they stay private. you know might be in some cases but as a result you know it's you know you have investors that are looking you know everywhere which maybe would have naturally happened anyway right is going to look in other countries for interesting opportunities and ideas but it's just so curious that in the US you know there's biggest most you know largest capital market system in the world and you know some of the best investors in the world that I know you know not to say they aren't looking in the US too but they're like well you know there's not as many quality businesses going public earlier on. You know, there might there's still quality here, but I know most of these days I'm tracking them. Why not go abroad and see what else is out there that has has some attractive valuations? So, love to hear your thoughts on on all of that and this current. >> Yeah. Yeah. I I would highlight uh the Micro universe is vast. I mean, we have, you know, it's about 1500 companies, I think, as of uh middle of this last year. So, it's still a very large universe uh of companies. So in the sense of it still having great opportunities in within there I think that's wonderful but we also have you have companies that come down into the space so that you have uh small cap companies or midcap companies that for whatever reason kind of we call them fallen angels come down they trip up either or their uh or their industry is out of favor. So those become opportunities and then the other thing too is I mean it it is very much we think of micro cap on a global basis. I mean, you have, and you kind of alluded to it, you have a vast universe outside the US. You have over 4,000 companies in developed markets, almost 4,000 companies uh in the developed markets in micro outside the US in micro cap and then another 3,400ish companies in emerging markets in micro cap. So, it's a it's a vast universe. uh and we do feel as if uh these these trends cycle in the sense of uh so becoming public and you know having uh reporting standards and uh daily being daily price there is value to that and uh we do see that as still a very vibrant uh part of the universe. >> Yeah, which you know we'd [clears throat] like to see more in the US. It' be nice. uh you know most other markets they make it it it's seeming you know their venture markets are a little bit more friendlier and easier to go public it's not as cost uh uh just depleting I guess uh it very much is in the US but you also mentioned catalyst that could drive a revaluation in micro caps things like M&A interest rate shifts and fiscal policy changes which of those factors feels most important in the current environment >> yeah the interest rates I mean the market has really traded on uh just potential for lower interest rates Right. So we feel like that's been one of the catalysts and you know frankly in historically what we've seen I think this is in line with history too. The first move is usually uh driven by some of the parts of the market that are a little bit more uh speculative or tied to themes. So but what we understand and appreciate being investors in micro cap over multiple market cycles is it it truly does come down to the company and the fundamentals over the full cycle. So we're excited that the markets are moving up and small and micro cap are winning. uh that the leadership of that been tough from an active management basis, but sticking to what the fundamentals that we know drive returns over a market cycle, we know that the excess returns are going to be best when people continue to focus on their approach that is u borne out through history. >> Very good. All right. So, you know, finally with regards to the white paper, you know, my my last question on that is, you know, you write that we're in the early innings of a long-term cyclical shift toward micro cap. What makes this moment particularly compelling and how should investors think about timing their entry? >> Yeah. Yeah. I' I'd say a couple things is uh in Wellington wrote a paper uh a couple years ago actually no is the end of last year uh related to just the cycles of small versus large and we dissociate that with micro cap and the cycles are usually 11 to 12 years. The cycle been longer than that 14. So, and and you think about that and then you think about the valuations uh the relative valuations between micro cap and large cap they've been particularly extended and you've had such a long time period. I think we have a generation of analysts in the industry that haven't seen a true micro cap micro small cap leadership. So, when you get eyeballs on a space that is then now turning I think the power of that move just given the valuation disparity is incredible. So, I think that's one of the particularly interesting parts of uh where we're at in the market and even as as much as we've seen the leadership thus far this year, it still feels like it's very early in even especially when you look at valuation disparity. >> 100%. So, Doug, my final question then for you here today, it's specific to AQAS. You know, for those that don't know AQAS, you guys are fund of funds. You guys um provide capital to uh micro cap fund man active micro cap fund managers. you guys have a very thorough thorough approach. You know, I've talked to many managers that have talked with you, you know, everyone's like, I love Doug, you know, everything like that and and Chris and the whole team, but at the same time, they're also like, man, they take a long time, you know, for for all that. So like how one I understand why a you know look you want to make sure you're you know you're deploying your capital you know correctly efficiently you know you got to do all your channel checks and everything like that but how do you weigh the all right this is our process to yes we take a long time but also potentially missing out on a talented manager that might have just had a bad year or a bad quarter or something like that and you're like all right well now we're not you know I just I'm I'm trying I'm just I've been want to ask you that for a while based on some of the feedback are we getting? >> Yeah, we we love to get to know our investors and and see them work uh in the specific buying and selling of their portfolio. Sometimes we can move quickly with the benefit also of knowing them from previous firms or kind of knowing their background or being able to see some of their background. But I mean, one of the things that we hold ourselves a high standard to with us is just making sure that we fully understand their approach, not only their approach to investing, but also how they manage their business and the the infrastructure that they set up. and then also what the future looks like that they understand some of the issues that they're going to end up running into especially as they grow. I mean it's um it the world changes as an uh as a strategy grows in assets as a business becomes more successful. So there's a there's we want to make sure that we understand every aspect. we can move quickly and we have moved quickly uh to invest early but that takes as you've noted we just we want to have lots of uh discussions and evaluation and analysis and we uh we pride ourselves in working with uh products at a small asset base and most often times that leads us to small firms. So, in the in the sense of also being able to be a resource to those folks, they're really that we appreciate that they're dedicated to the space, but also that they're they are also going to want some uh perspective on what the future is going to look like as an organization, especially as they kind of hit new milestones in terms of the business growing and being able to add people and other add other elements to their business as they need. Uh we also want to be [snorts] that resource to the managers so that they're as successful as possible and ultimately with the hope that their their success is directly tied to our clients as they are in one of our client portfolios. >> 100%. So what's been most interesting right now and I mean I I don't know how often you guys think I mean I know you have your discipline approach of what you're looking for and you know obviously taking the time want to get to know them so that in any industry any time period you feel comfortable in allocating that capital to that manager. But what's been most interesting right now? I mean, has there been any, you know, ideas or strategies that have been more specific to one sector that you've been finding interesting? Or have there been any strategies that, you know, have a interesting trading option style? I don't know. You know, I'd love to hear what what's been most interesting right now. >> Yeah. I I think of a couple things. I first and foremost, the manager that's truly diving into the most obscure part of the market and finding the gems. That's always interesting and that that never changes. and and and frankly as the pressure gets more intense on the smaller firms as the bigger firms continue to take more of the market share um finding those that are really doing that is always uh tremendous and it and there's more pressure to look like the other larger manager uh so those that are truly staying away from that and focusing on what what's going to drive uh returns I think that's that's always interesting to us I'd say on the other side too is just data Uh so you see a lot of and you you I'm sure you see this too where you said a lot more quantitatively oriented investment strategies. So those folks that are able to find interesting new information from frankly now what they can create data sets um and evaluate companies from a number of different aspects and then also just value the whole universe simultaneously and the speed with which they can do that that's been incredibly interesting and also uh working in the ecosystem even if I'm not a quantitative manager but I understand those that are investing alongside me and why they are making buy to sell decisions related to their approach. I think understanding that ecosystem and those uh those return drivers uh and how that's evolving. There's been a lot of quantitatively oriented money that's moved into the micro cap space cuz it's a really interesting asset class, but also related to that, there are drivers of those types of processes that people need to be aware of. >> 100%. Well, Doug, I we we've covered a lot today. covered the putt white paper, why you guys wrote it, why you updated it? Um, you know, and the message is still clear that there is a case for micro caps. But, um, real quick, final thoughts, anything you want to leave us with with regard to micro cap investing, you know, rest 25 going to 26, you know, what what's been what else has been on your mind? >> Oh, I did I just I just want to appreciate uh your business, Robert, and what you do and providing a forum for dedicated micro cap investors to assess management teams and then also collaborate with each other. I think that is of >> thank you >> of high value and increasing value especially as we get to a a place where there's just more distraction and also just the uh more uh pressure from the big businesses that are uh trying people having people focus on bigger things. So say that and then also just uh we want to be a resource to the community. So, if you're a micro cap investor that's out there, uh if you haven't reached out and talked to us at Audus, we'd invite you to reach out to us via email or if you're out this way in the Seattle area, please uh stop by. Um and two, it doesn't you don't have to have a setup business. If you're someone that's thinking about setting up a business, we'd love to be a resource to you just to give you some perspective on the things that we see and the things that we've learned over the years uh working with small businesses. So, we think it's one of the most interesting areas of the market in terms of the opportunity and like you mentioned, Robert, we'd hope that more really passionate investors uh that want to manage money for people and the and that and generating returns that they would come to this space cuz um it is one of the most interesting spaces and one of the few spaces left where you have the potential to generate an edge on the consensus. >> Man, that a beautiful way of ending it. Nice. Nice work, dude. Well, uh, Doug, always a pleasure. Thank you for joining us today. Uh, real quick, the website it's aqatas.com, right? >> Yeah, www.qudisinvestments.com. We have a white paper section we've written. I mentioned the case for micro cap. We also have a case for international small micro cap, a number of different uh elements from an academic basis on micro cap. So, yeah, happy to be a and if if you don't see it there, uh, please reach out and ask us the question. So, always happy to write on uh items related to micro cap. Very cool, Doug. Again, thank you very much for joining me today. Really do appreciate it. Good luck. Stay safe and I look forward to our next conversation. >> Thank you, Robert. Take care. >> Bye. [music] [music] [music]