It’s a Small World - Manager Dynamics in International Small Caps

Abstract

Since the beginning of the decade, flows to institutional and retail products in the international small cap space have grown at a faster clip than flows to international large caps. The reasons for this are fairly obvious - greater alpha generating opportunities and higher diversification potential. In this paper, we explore three questions that often present themselves to institutions considering allocations to this asset class: - Does active opportunity translate to alpha? We find that managers have been able to translate the higher dispersion of asset prices into realized alpha. In particular, managers have excelled in periods of higher dispersion. - Does size matter? Contrary to popular belief, we find that fund size has not been a major constraint for larger funds despite operating in an asset class comprised of smaller, less liquid names. - How important is past performance? We find that persistence among the top quartile managers is low, with less than a quarter of top quartile managers retaining top quartile status over a three-year horizon.