"Something really exciting": Why microcaps should be on your radar
The smallest part of the market offers a huge investible universe and the opportunity for genuinely impressive long-term growth.
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Please note that this interview was recorded on Tuesday 3 February 2026.
A sector brimming with valuation inefficiencies, broad exposures and under-the-radar growth stories should be a happy hunting ground for any investor.
And that was the thought process behind the formation of the UBS Microcap Fund, says Yarra Capital Management portfolio manager Joel Fleming.
"We started the fund because we wanted to leverage that inefficiency that exists in the smallest part of the market," says Fleming. "There's been some really good fund managers producing great returns over long periods of time, and it's an area where we thought we had some expertise to bring a new product to the market."
The fund has comfortably outperformed its benchmark since its inception in 2014 and Fleming has been there every step of the way. And the value proposition is simple:
"It's about leveraging this wide investible universe that's available - it touches the full spectrum of the economy and that ability to drive long-term capital growth for people."
One of the few dedicated microcap managers, the fund only invests in companies with market caps initially below $250 million. "We're really trying to fish in that micro cap pond," says Fleming.
But it's a pond that has produced some of the ASX's biggest recent success stories like Pro Medicus (ASX: PME), Hub24 (ASX: HUB) and Codan (ASX: CDA), which started life as microcaps. Fleming was there from the start.
"The best part of this opportunity set is that things like this happen all the time - that those stocks really over a number of years start to graduate up and going on an amazing journey of shareholder wealth creation."
In this interview, Fleming explains why microcaps offer so much appeal to investors, what happens when their stocks graduate to the big leagues, and why microcaps deserve a place in your portfolio.
While the microcap space has a reputation for speculation, Yarra and Fleming have outperformed by leveraging their experience and taking a more patient approach.
"We think longer term," says Fleming. "We don't want to buy conceptual stocks, and that's a bit of a misnomer about microcap investing: that it's punting, it's only concepts. We want to buy companies that we believe have a really strong chance of turning into much more durable, sustainable businesses."
It's also about being active and getting boots on the ground to find the genuine growth companies.
"Everyone's having a lot of meetings and that's really helpful in terms of us trying to get the most out of the micro cap sector with all that internal work that's done," says Fleming. "With these companies, you've got to do your own work. There isn't a huge amount of coverage."
"The fact is there aren't a lot of fund managers that have capacity available in microcaps with this track record. That's something as well that we think stands us apart from others out there."
Those willing to put in the work are rewarded with a wealth of opportunities, given both the size and breadth of the microcap space.
"Our investible universe is so big," says Fleming. "If we identify a thematic or a change in the market - you think about the data centre thematic, the AI thematic issues around electrification - they're big structural changes occurring in the market. Microcaps allow you to go in and find really niche exposures to those themes."
It's something that's arguably unique to the microcap sector, says Fleming, "the idea of the full spectrum - being able to get really niche exposure or early stage exposure to companies that do go on to become part of the ASX 100."
The fund is still permitted to hold a stock if it graduates to small-cap status or beyond, and for good reason, says Fleming.
"I take the view that if we've done all that work early and we've found something, and we believe that our knowledge gives us a competitive advantage over the rest of the market about where this company's going to [then we'll continue to hold]."
Of course, they'll assess any company on its relative valuation, and the opportunity cost of holding a stock that has graduated up the index.
"If I still think I have an edge as it goes into the top 100, because I'm prepared to look into the future and believe that those underlying economics are going to work out better than what the analysts are thinking, we still want to hold these stocks."
"But there always comes a point where you think, 'I've captured a huge amount of the value on offer, and hopefully I've got other places that that money can be deployed and we can invest in the next Pro Medicus or the next Codan'."
For investors considering allocating some capital to microcaps, the key benefits are diversification and growth, says Fleming. "It's a differentiator. It's going to give you different return and different risk measures than other parts of your portfolio."
"It's a small part of the portfolio where you are putting some money to work with an active manager because they can go out and take full advantage of an inefficient part of the market."
"We look at it as a satellite exposure - looking for that long-term capital growth, providing a bit of differentiation to your broader portfolio, but also investing in some early-stage businesses, which are pretty exciting."
"At the end of the day, micro caps are off the radar for a lot of investors, but the potential opportunity that exists is something that's really exciting."
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Tom is a Senior Investment Writer and Presenter at Livewire Markets, having worked as a writer and editor for 10 years, specialising in investing and personal finance.
He has previously worked at Finder, FourFourTwo and Man Of Many covering everything from film to football.
He has a Masters in Media Production and a Bachelor's in Journalism.
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Tom is a Senior Investment Writer and Presenter at Livewire Markets, having worked as a writer and editor for 10 years, specialising in investing and personal finance. He has previously worked at Finder, FourFourTwo and Man Of Many covering...
Expertise
Tom is a Senior Investment Writer and Presenter at Livewire Markets, having worked as a writer and editor for 10 years, specialising in investing and personal finance. He has previously worked at Finder, FourFourTwo and Man Of Many covering...
Expertise
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