Small-cap equities may benefit from inefficient markets

Inefficient markets may present good opportunities for small-cap equities, according to Eaton Vance.

The firm’s director of global small cap equity, Aidan Farrell, stressed that small caps typically had fewer analysts per stock.

Additionally, recent regulation known as the Second Markets in Financial Instruments Directive (MiFID) aimed to unbundle the availability and cost of research from the execution and cost of trading.

This led to both American and international small-cap sectors becoming ripe for active management, Farrell said.

“The paucity of analysts leaves small caps with fewer earnings estimates and greater dispersion around these estimates. And, depending on European regulation, the coverage may dissipate further.

“Active managers can uncover value in a large, less explored universe where greater dispersion of business results means more chances to capitalise on market inefficiencies.

“Active managers can choose stocks outside of indexes and defensively position a portfolio in down markets.”