David-100x100Tribeca Investment Partners has launched a small-cap trust with its affiliated company Grant Samuel Funds Management to give better access to small institutions and the retail market.

The Grant Samuel Tribeca Australian Smaller Companies Trust, which has just received an ‘A’ rating from van Eyk Research, has been seeded with about $20 million, mostly through an institutional mandate. Ratings from other research houses are currently in train.

The trust is being managed in the same fashion as Tribeca’s small-cap fund and discrete mandates by David Aylward (pictured), the managing director and co-founder, who has been managing small caps with the firm for more than 12 years.

While small caps have performed roughly in line with large caps over the past 10 years, almost all small-cap managers have outperformed their index. In Tribeca’s case, the manager has averaged 13.5 per cent a year from small caps in the 10 years to September, compared with the S&P/ASX Small Ordinaries Index return of 7.7 per cent and the S&P/ASX 100 Index of 7.8 per cent.

Aylward says that the small-cap effect still persists, although there are cycles when smaller companies as a whole will outperform or underperform large caps for various periods.

“There is a cyclical element but we say that that is difficult to pick,” he said yesterday. “We believe clients  are better off with a permanent allocation and then trying to get the alpha in the small-cap market, which is persistent.”

Tribeca’s style is to research about 200-230 stocks – above a market cap of about $100 million – and invest in 45-50 at any one time.

Aylward said that the two main reasons for the persistence of alpha in small caps were information arbitrage and the different market participants compared with the large-cap sector.

“Information arbitrage really does exist. Managers who are skilled in picking stocks can have that information advantage,” he said.

“We did some work a while ago which showed that once you get past stock number 20, the (broker) forecasting errors are much greater.”

With the market participants, international managers do not provide much competition because there are very few global small-cap managers. And retail investors make up a higher proportion of the small-cap market compared with large caps. Retail investors tend not to have the same buy and sell disciplines or research capabilities as the professional managers.

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