Spotlight Should they overweight their portfolios toward value and small caps? Ting: Most investors will not get the timing Ting: Micro-caps were punished more on the Kay: So you don’t think that there is any sort of leverage story or difficulty getting bank credit that could hurt micro-caps? Ting: The impact of not being able to access right; as we’ve seen with the recent volatility, timing does matter. For a typical investor, it’s better to use a tilt as a tactical move, rather than a making a specific bet and going, say, 100% value. Kay: Micro-caps have gone on a tear over the past three months. Do they seem a rich now? downturn and recently outperformed. But the majority of micro-caps were not affected structurally by the financial crisis. This recession is different than others; it is not just the economy that matters but also the financial structural differences of companies in terms of accessing the credit market and how a company can expand and grow. Because of this, when the economy turns around, micro-caps that were hurt because of the economy and not because of their financial structure will benefit. credit is less for micro-caps than larger companies because they didn’t have a lot of credit access before the crisis. Large-cap companies got used to free-flowing credit; micro-caps learned in the good times how to make do with less. K Bradley Kay is an ETF analyst with Morningstar. 44 Morningstar Advisor August /September 2009