The Active Management Premium in Small-Cap U.S. Equities

Abstract

Active managers of small–cap U.S. equity portfolios have consistently and significantly outperformed the Russell 2000 over the past 20 years, while active managers of large–cap U.S. equity portfolios have barely kept pace with the Russell 1000. Is small–cap a less efficient market, and a more productive place to spend active risk capital? A robust database of over 780 institutional small–cap managers allows examination of the historical behavior of the small–cap premium over the last 20 years. After taking into account survivorship bias, instant history bias, and a mild large–cap growth bias in the universe, we see the small–cap active management premium seems to have been significant and consistent over the period.