An "All Star" Choice

02/03/2006 12:00 am EST


Ron Rowland

Editor, All Star Fund Trader

Ron Rowland, editor of  All Star Fund Trader, has an industry-leading track record; his fund portfolio has gained 1069% return over the past 11 years. Here, his top pick for 2006 is based on an expected move by institutional investors into the under-followed micro-cap sector.

"There are thousands of publicly-traded companies in the US that are usually overlooked when individual investors and institutions build their portfolios. Most Wall Street analysts are paid to provide research on the largest companies. As we move down the capitalization scale, the number of analysts tracking any given stock begins to fall off dramatically. The Russell 3000 Index represents about 98% of the dollars invested in US stocks. The Russell 2000 Index is the most widely followed small-cap index. Now, it has developed a new microp index based on the smallest 1,000 companies in the Russell 2000 along with 1,000 even smaller companies.

"Said another way–the Russell Microcap Index excludes the 2000 largest companies in the US, the ones where the majority of analysts focus. So it is easy to see why these companies are often overlooked when building portfolios–the extremely large quantity of companies combined with the lack of analyst coverage makes it easier to invest elsewhere. Russell and Barclays have changed all of that with the recent introduction of the iShares Russell Microcap Index Fund (IWC NYSE), an exchange-traded fund that is our favorite fund pick for 2006. Now, with a single transaction, an investor can gain exposure to the world of micro-cap stocks.

"Institutional investors are constantly on the prowl for new asset classes. Their asset allocation models look for investments that can improve the overall risk:reward profile of their portfolio. Their quest for more and more diversification and risk control leads them to more and more unique asset classes. Micro-cap stocks are just such a class. Until now, institutional investors have avoided this asset class because there was no vehicle that allowed them to access it economically. Institutional investors have long trusted the Russell name, and they have grown to embrace ETFs the past few years. Therefore, we expect a significant shift of assets into the micro-cap area, and since this area represents an extremely small piece of the US stock market, this increase in demand should drive up prices."

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