Investing in small cap shares can be a useful diversification tool as it often provides investors with exposure to industries or sectors that are not typically represented by the ASX's large cap shares.
In addition to this, small cap shares offer the potential for huge returns over the long term. This is because the law of large numbers means it is much easier for a $250 million company to double or triple in value than a $25 billion company.
Though, it is worth noting that small cap shares carry more risk than their large cap counterparts. Because of this, I wouldn't recommend investors go overweight with small caps and instead would limit exposure to around 5% to 10% of a portfolio.
Three exciting small cap shares which I think could be great additions to a balanced portfolio are listed below. Here's why I like them:
Citadel Group Ltd (ASX: CGL)
Citadel is a specialist in managing information in complex environments through integrating know-how, systems and people to provide information on an anywhere-anytime basis. Although its performance has thoroughly underwhelmed in FY 2019, this is largely down to its pivot to becoming a global software and services company under the Citadel 2.0 strategy. This has caused some short term pain, but I'm confident it will result in material long-term gain. A number of insiders have been buying its shares in the last couple of weeks, which could be a sign that now is a good time to get on board.
LiveTiles Ltd (ASX: LVT)
LiveTiles is a digital workplace platform provider and award-winning Microsoft Partner. Demand for its platform, which allows users to easily create dashboards, employee portals, and corporate intranets, has been growing at an incredible rate in recent years, leading to the company reporting stellar annualised recurring revenue (ARR) growth. The good news is that this strong growth has continued in FY 2019 with the company recently revealing that its ARR had more than tripled year-to-date to $34.5 million at the end of the third quarter. Pleasingly, management certainly isn't resting on its laurels and appears confident it can grow its ARR to $100 million by the end of June 2021.
Straker Translations Ltd (ASX: STG)
Straker Translations is translation services platform provider with a difference. It uses a combination of artificial intelligence and human intelligence to provide highly efficient language translation services at scale. Thanks to a combination of strong demand from existing customers and new customer growth, in FY 2019 Straker Translations posted a 44% increase in revenue to NZ$24.6 million. Whilst this was impressively strong growth, it is still only scratching at the surface of a market that management revealed is expected to be worth US$66 billion per annum by 2022.
