Investment Manager Skill in Small-Cap Equities

Abstract

Using a representative sample of monthly portfolio holdings and daily trades, this study presents unique evidence of significant stock selection skill amongst institutional small-cap equity managers on a risk-adjusted basis. Of particular importance is the magnitude of the performance generated by fund managers in our sample, with cumulative abnormal returns (CARs) over a one-month period for holdings-based and transactions-based metrics of 59.7 and 64.1 basis points, respectively. The evidence reveals that small-cap equity managers possess superior stock selection ability, from both a statistical and economic perspective. Our results are robust to the deduction of transaction costs. Our research provides important non-U.S. evidence concerning the value of active management, in a market segment which exhibits both lower liquidity and lower analyst coverage.