Hortz: How do you see that microcap equities can be best deployed for maximum portfolio construction and management benefit?

Corbett: An investor receives enhanced risk-adjusted returns, augmented diversification through non-correlated performance, and delivers many of the benefits of private equity and venture capital within a liquid vehicle, all by allocating a small percentage of microcap stocks to their portfolio. Our research has shown that returns are enhanced and volatility reduced when a small-cap allocation is complemented with a microcap allocation. We have a variety of investors that allocate between 3 percent to as much as 20 percent of their portfolio to microcap equities.

Hortz: You have both a microcap fund and an ultra-microcap fund. Please describe the difference in companies and the nature of the two portfolios? 

Corbett: Our flagship fund is the Perritt MicroCap Opportunities Fund (PRCGX), which invests in companies that have market capitalization between $50 million and $500 million. Our Perritt Ultra MicroCap Fund (PREOX) invests in even smaller companies that have market capitalization between $10 and $300 million, but most of the companies have market caps below $100 million. These can include early stage companies and those with relative obscurity in the investing world. Our investment process is the same for both funds emphasizing profitable companies with high growth potential and strong returns on capital.

Hortz: As a pioneer in this area of investing, any interesting stories or observations on this space?

Corbett: Microcap companies come into this space in many forms. You may think an Initial Public Offering (IPO) may be the most obvious, but that is the least likely entrance. Some enter to the space through a spinoff, reverse merger or some of which we call “fallen angels.” It is also important to note that since 1992, 60 percent of all public M&A transactions occurred at the microcap level. The microcap space is ever changing, and it is important to monitor all the roads to and throughout the microcap world.

Hortz: What about the few indices that have been built to capture the microcap space? Did they get it right? Are they truly representative of the space?

Corbett: Microcap companies are the true small companies in the marketplace. Some firms even consider the space un-investable. Frank Russell & Company, however, did launch a micro-cap index in 2005. The Russell Microcap Index is a reasonable proxy due to the size of the companies in the index.  However, nearly half of the companies in the index are not profitable, which does concern us about the quality of the index.

Hortz: What do you see as further development and future of this investment area? Microcap ETF’s and other vehicles coming our way? 

Corbett: There are nearly 50 percent less publicly traded microcap stocks today versus nearly 20 years ago. We believe this decline is starting to reverse in the past year, which should be a net positive for investors. In terms of microcap ETF’s, there are very few available to investors, but one of which is the iShares Russell Microcap Index (IWC). As mentioned in earlier answers, I would be a little hesitant to recommend this investment vehicle due to the low quality of many representative companies in the index.  

Hortz: On another note, out of curiosity, I see that you hired Sondhelm Partners to help you acquire a few other small funds. Why are you buying versus building new funds and what do you look for in an acquisition? 

Corbett: We hired Sondhelm Partners to explore alternatives for our business, but primarily to purchase assets of other funds. The desire is to acquire another mutual fund, and merge the assets into one of our other funds. We are still open to all opportunities.