The thesis that institutional investors should take a higher weighting to global small caps split opinion among a panel of investors at the Fiduciary Investors’ Symposium.
Andy Flynn, co-portfolio manager of global small caps at William Blair, told delegates there has been a sharp increase in the investable small cap universe over the past decade – almost double – and many global small cap companies are now more dominant than large cap companies.
“Only six per cent of the 1000 active global mandates in the world are global small caps. If you take a peek at market cap, it’s actually 16 per cent so we are almost one third underrepresented within the global small cap universe,” Flynn said.
He argued that active managers are able to select from a more balanced sector opportunity set and a global small cap portfolio enjoys emerging small caps which can give superior valuation and growth characteristics.
Janice Sengupta, chief investment officer at AonHewitt, gave caution to this view citing a study her colleagues had undertaken in 2001 called the ‘small cap alpha myth’. The study found when controlled for fees, transaction costs, data specification, survivorship bias, natural bias and the tendency of managers not to report returns when getting started up, that much of the supposed 400 bps of alpha would shrink down to 100 bps.
She added this study was updated last year and showed that alpha in small caps had reduced over the intervening years. Additionally there are more nuances where, depending on the style of the manager, it can drop down to negative alpha.
“If you like the idea of small caps don’t do it blindly and don’t do it passively, because you could be severally disappointed,” she cautioned.
Joshua Bloom, portfolio manager at Sunsuper, said the fund doesn’t have global small cap managers as they were hard to find in what is a small universe. Instead they had more success finding regional managers who could deliver the objectives.
He added costs end up eating into the premiums, making it difficult for institutional investors to dedicate a lot of resources to small caps, but that “one nice thing about emerging market small caps is being exposed to the economy in a purer way”.