The Globe and Mail reports in its Wednesday edition that the all-cap S&P/TSX Composite Index is up 22 per cent year-to-date to Oct. 31. Guest columnist Robert Tattersal writes that the TSX Small Cap Index returned 37 per cent, while the TSX Venture Index returned 60 per cent over the same time period. One useful attribute of small cap stocks, which is often overlooked in portfolio construction, is their ability to introduce diversification. For many small companies, success is primarily dependent on new product introductions, the competence of senior management and balance sheet flexibility. They may be affected by a few big-picture issues such as tariffs into/out of the United States, but they are essentially impervious to central bank interest-rate moves or similar macro issues. It is not difficult to create a small cap portfolio made up of companies in very different industries and has low correlation with the fortunes of the big cap index holdings. The consensus is that 30 to 40 names are necessary for diversification. Investors should always maintain exposure to the small cap sector because you never know when the superior returns will be delivered, but sensible diversification is a key element of the strategy.