In conclusion In summary, a strategic allocation to global small-caps warrants consideration for the following reasons: Small cap premium – Historically, over the long-term, small-cap shares have significantly outperformed large- and mid-cap shares. Portfolio diversification – Over the long-term, small-cap indexes display a less than perfect correlation to large- and mid-cap indexes. The differences in index performance between small-caps and their larger counterparts may be due to differences in sector and regional weights, greater earnings volatility, liquidity and transaction costs. Global small-cap inefficiency – A number of factors imply greater potential for active investment management to add value with global small-caps relative to largeand mid-caps. These factors include: lower levels of broker research, greater dispersion of small-cap share investment returns relative to large- and mid-cap shares, and capacity constraints which may make it difficult for broad-cap global equity investors to hold small-cap shares. Breadth of the global smallcap opportunity set – The greater number of shares to choose from provides skilled managers with more opportunities to select winning shares. There are some important factors to keep in mind when considering an allocation to global small-caps: 1. The small-cap premium – the performance of global small-caps relative to large- and mid-caps – can be cyclical and investors must be prepared to hold an investment beyond five years to see the benefits of outperformance. 2. While there is evidence of diversification benefits from an allocation, as described above, it is also apparent that during extreme market conditions the investment returns of global small-caps have historically been highly correlated with investment returns of their larger counterparts, reducing the diversification benefits. Once an allocation to global small-caps is regarded as appropriate by an investor, then, in terms of execution, it is important to remember that: 1. Global equity managers will be impaired in their ability to include global small-caps in their portfolios due to capacity constraints and liquidity issues. 2. There are significant challenges in generating a suitable cost-effective index (ie passive exposure). 3. There is evidence of the difficulty for active investment managers to consistently outperform a benchmark over periods greater than three years. A full list of references for this article is available from Daniel Grioli, by contacting d.grioli@gmail.com