Contrasts the various strategies employed by
Table of Contents
Introduction xiii
Acknowledgments xvii
CHAPTER 1 The Small-Cap Advantage 1
Two Sources of Outperformance 1
Small-Cap Definitions 2
The Outperformance of Small-Cap Stocks 10
Outperformance within the Small-Cap Space 15
Chapter Summary 19
CHAPTER 2 Small-Cap Disadvantages 21
Research 21
Trading 23
The Small-Cap Graveyard and Reverse Survivorship Bias 28
Capping Assets 29
Chapter Summary 31
CHAPTER 3 Small-Cap Investment Philosophy and Process 33
Institutional Approach 33
Passive and Enhanced Indexing in Small-Cap Stocks 34
Active Management in Small-Cap Stocks 36
Chapter Summary 70
CHAPTER 4 Small-Cap Manager Organization 71
Creating Value for the Manager 71
Launching a Small-Cap Firm 72
Investment Team 86
Chapter Summary 94
CHAPTER 5 The Fund-Raising Process 95
General Marketing Strategy 95
Institutional Clients 98
Foundations and Endowments 104
Consulting Firms 105
Pension Plans 108
High-Net-Worth Individuals 112
Wrap Fee and Other Subadvisory Relationships 114
Databases 115
Third-Party Marketers 116
The Chicken-and-Egg Problem 118
Chapter Summary 119
CHAPTER 6 Fees, Agency Issues, and Other Performance Drags 121
Common Performance Drags 121
Frictional Costs in Small Caps 124
Institution-Manager Agency Issues 129
Agency Issues in Trading 131
Benchmark Tyranny 133
Commingled and Separate Accounts 134
Chapter Summary 138
CHAPTER 7 Small-Cap Managers and the Endowment Model 139
The Endowment-Model Approach to Small Caps 139
Finding an Edge 142
Funding Smaller Managers 145
Funding Emerging Managers 147
Finding Emerging Managers 149
Chapter Summary 151
CHAPTER 8 Evaluating Small-Cap Managers 153
Institutional Due Diligence Teams 153
Assessing Manager Risk 155
Assessing Investment Philosophy 158
Analyzing a Manager’s Process 159
Evaluating Firm Principals 167
Assessing Manager Operations 169
Contributions and Withdrawals 172
Chapter Summary 174
Final Thoughts 175
Notes 177
About the Author 183
Index 185
