Small cap equity strategies draw attention of pension funds

Pension funds along with other investors, who traditionally had lower exposure to small cap equities, showed greater interest in these strategies over the past year, whether regional or global, according to a white paper from bfinance.

The firm said that this lack of exposure towards small cap equities strategies was driven by two key trends of the past decade such as the move from regional to global equity strategies and the shift towards passive investments.

Additionally, small cap exposure was largely absent from passive global broad market indices unless institutions specifically decided to implement this investment in their small cap strategy or index.

Also, where investors did have additional small cap exposure, it was often confined to the domestic market, particularly for institutions from the US and Australia.

However, investors were still seeking to expand the drivers of return within equity portfolios  through geographical and strategic diversification, with the priority to help drive and shape demand for small caps.

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At the same time, those investors who were looking to this particular asset class should be reminded to scrutinise differences, sector exposures and drivers of active manager performance.

“Investors looking to increase their exposure to small cap equities should carefully consider whether global or regional approaches to small cap represent the optimal approach for their portfolios,” bfinance’s senior director and head of equity, public markets, Justin Preston, said.

“In doing so, it is important to remember that the best path may be determined not purely by theory or examination of the indices but by the appropriateness and attractiveness of solutions available in the market today. Investors complementing equity portfolios with small cap exposure face a set of portfolio design choices.

“To some extent, these mirror those available in mid/large cap equity investing, including global vs regional, active vs passive, discretionary vs systematic. However certain aspects of implementation can be more challenging on the small cap side, and those issues vary significantly by geography.”