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5 Reasons Why US Micro Caps Should Be in Your Portfolio
For years, global equity portfolios have increasingly gravitated towards the same destination: mega and large companies.
The Mag 7 now account for a significant proportion of major US equity indices, leaving many portfolios increasingly concentrated in a relatively small number of companies. While these businesses have delivered strong returns, investors seeking diversification within their US equity allocation may be overlooking a part of the market that has historically been a powerful source of innovation, growth and active management opportunity: US micro caps.
Often perceived as illiquid, speculative or excessively risky, the reality is that today’s micro cap universe contains thousands of established businesses operating across sectors such as health care, technology, and industrials. For long-term investors, it represents a distinct segment of the market that can complement existing equity allocations and potentially enhance portfolio outcomes.
Here are five reasons why.
1. The Risk Is Not What You Think
Micro caps have historically delivered a risk-adjusted return profile comparable to small caps.
The perception that micro caps are inherently too risky for diversified portfolios is one of the most common reasons investors avoid the asset class.
While individual companies can exhibit higher levels of volatility, the broader asset class tells a more nuanced story. Over the past 25 years, micro caps and traditional small caps have delivered remarkably similar rolling 3-year Sharpe ratios, suggesting that investors have historically been compensated for the additional risk they have assumed.
Small/Micro Cap rolling 3-year Sharpe Ratio over the past 25 years
Source: Oberweis as of 31st December 2025. Past performance does not guarantee future results.
Importantly, risk within micro caps is not uniform. A disciplined investment process that focuses on profitable companies with strong balance sheets and sustainable growth characteristics can help avoid many of the more speculative areas of the market.
The key takeaway is simple: micro caps may not be the high-risk outlier many investors assume them to be.
2. The Market Isn't Watching
Limited analyst coverage creates opportunities for active managers.
One of the defining characteristics of the micro cap universe is how little attention it receives from the wider investment community.
The typical micro cap company is covered by a median of just three sell-side analysts as opposed to larger companies that may be followed by dozens of analysts, institutional investors and research providers.
This lack of coverage can create persistent market inefficiencies. Companies may be misunderstood, underappreciated or simply overlooked, resulting in valuation disconnects that active managers can seek to exploit.
For more than two decades, Oberweis Asset Management (the investment manager sub-advising our VAM US Small and Micro Cap Growth Funds) has specialised in identifying growth companies where market expectations may not yet fully reflect underlying business fundamentals. Through extensive company research and direct engagement with management teams, the investment team seeks to uncover opportunities before they become widely recognised by the broader market.
In an increasingly efficient investment landscape, micro caps remain one of the few areas where information advantages may still exist.
3. Built for Today's Macro Environment
Global markets continue to grapple with trade tensions, geopolitical uncertainty, tariffs and currency fluctuations.
Against this backdrop, the domestic nature of many US micro cap businesses is particularly noteworthy.
On average, micro cap companies derive approximately 85% of their revenues from the US market, compared with around 60% for large cap companies. This means their revenues are often more closely linked to domestic economic activity and less dependent on international trade flows.
Investors therefore gain exposure to themes such as US infrastructure spending, reshoring of manufacturing, industrial investment, healthcare innovation and the continued adoption of artificial intelligence (AI) across the economy.
For investors seeking exposure to US growth while reducing reliance on global revenue streams, micro caps offer a differentiated proposition.
4. A Gap Your Small Cap Allocation Isn't Filling
Many small cap portfolios are no longer providing meaningful exposure to the smallest companies.
Over time, many traditional small cap managers have gradually moved up the market cap spectrum.
As markets have appreciated, the average market capitalisation of many small cap portfolios has increased, leaving investors with less exposure to genuinely small businesses than they may realise.
Micro caps can help address this gap.
Rather than replacing an existing small cap allocation, they can complement it by providing exposure to a distinct segment of the market that many portfolios currently lack.
For advisers constructing diversified client portfolios, the opportunity may not be choosing between small caps and micro caps, but recognising that each plays a different role within the broader US equity allocation.
Micro caps provide access to companies earlier in their growth journey, potentially expanding the opportunity set beyond what a traditional small cap mandate can deliver.
5. Small Allocation. Meaningful Impact.
Historical evidence suggests that even modest allocations can have a significant impact on portfolio outcomes.
When evaluating any asset class, the most important question is ultimately whether it improves portfolio construction.
Typical allocation is represented by the IA Mixed Investment 40–85% Shares which refers to a multi-asset fund that hold between 40% and 85% of their portfolio in equities, with the remainder in bonds, cash or other assets; making it a balanced but equity-heavy option as defined by the Investment Association.
Source: Lipper IM. Data as of 31st March 2026. Using the E share class, with an annual management fee of 1.00%. Past investment performance is not an indicator of future returns. The performance shown reflects management by Driehaus Capital Management until 12 February 2026, when OAM was appointed Investment Manager. The performance figures shown are simulated based on historical fund data for the stated allocations Simulated past performance is not a reliable indicator of future returns, and the value of shares may fall as well as rise. *Performance prior to 21st October 2020 is hypothetical and based on the B share class of the VAM US Small Cap Growth Fund, adjusted to reflect the E share class’ annual management fee of 1.00%. Past investment performance is not an indicator of future returns.
As can be seen in the chart above, adding a 5% allocation to US small caps and a 5% allocation to US micro caps would have increased portfolio returns by 39% relative to a traditional balanced portfolio, while increasing volatility by only 1%.
While past performance is not a reliable indicator of future results, the findings highlight how adding a small cap allocation can potentially enhance long-term portfolio outcomes without materially changing overall portfolio risk characteristics.
The VAM US Micro Cap Growth Fund provides an example of this potential. As of 31st March 2026, the Fund had delivered a return of 1,041.7% compared to 258.4% for the index since launch of the fund, and was ranked in the top decile of its peer group over several time periods as shown in the table below.
Source: Lipper IM. Data as of 31st March 2026. Past investment performance is not an indicator of future returns. The performance shown reflects management by Driehaus Capital Management until 12 February 2026, when OAM was appointed Investment Manager.
For investors willing to look beyond the mega caps, the micro-cap universe may represent one of the most overlooked opportunities within US equities today.
Looking Beyond the Familiar
As portfolio concentration continues to rise, investors may need to look beyond the most widely owned parts of the market to uncover differentiated sources of return.
With exposure to innovative businesses, a domestic US growth profile, significant market inefficiencies and the potential to complement existing small cap allocations, US micro caps deserve consideration as part of a diversified long-term portfolio.
The question may no longer be whether micro caps are too small to matter.
It may be whether investors can afford to ignore them.
IMPORTANT - PLEASE READ
Source: VAM Funds – An Alquity Group Company
Information correct as of 31st May 2026.
FOR PROFESSIONAL INVESTORS ONLY.
Past performance should not be taken as an indication or guarantee of future performance. Portions of the fund information contained in this document were supplied by Lipper, A Refinitiv Company, subject to the following: Copyright 2026 © Refinitiv. All rights reserved. Lipper shall not be liable for any errors or delays in the content, or for any actions taken in reliance thereon.
The information provided does not constitute investment advice and should not be considered a recommendation to purchase or sell any particular security. References to specific securities and their issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Holdings are subject to change and may not be representative of the Fund’s current or future investments. Top holdings and sector allocations are as of the date indicated and are subject to change.
The companies mentioned are shown for illustrative purposes only, do not constitute investment advice, and are not a recommendation to buy or sell any security.
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