Small cap stocks may be risky, but they’re great for investors who want to make money in this type of market, said Chao Chen, portfolio manager at TFS Capital.
“Historically, small caps outperform large caps by 6 percent over the last 100 years,” Chen told CNBC.
Chen suggested investors look for inefficiencies that are uncorrelated to the general movements of the market when investing in small cap names.
“We have a very diversified portfolio, which helps to reduce the volatility,” he said.
Largest 5 Holdings in Chen's Fund:
Coventry Health Care
“Even these are large holdings compared to the others in the fund, they only comprise about 3 percent of the fund in total,” he said. “So the performance of the fund doesn’t depend on any individual stock doing well, but how the strategies perform.”
Chen owns shares of all the companies above in his TFS Small Cap Fund.