Demand for small cap equity strategies from pension funds and other asset owners appears to be on the rise, according to consultancy bfinance.

It said it registered “notably” greater interest among the institutional investors that it worked with, and that the underlying motivations for making small cap investments were evolving.

“While the academic and investment communities have become somewhat sceptical about the so-called ‘size premium’, allocators are instead looking towards small cap to complement and diversify their existing exposures, seeking stronger risk-adjusted returns over the long-term,” it said in a report.

This was because, in the recent extended bull run, strong equity market returns had been “somewhat reliant on a relatively modest number of large cap stocks”.

bfinance’s clients had shown interest in both regional and global small cap strategies, with the number of products of the latter type rising rapidly.

The consultancy estimated there were more than 70 such strategies available, three times more than 10 years ago.

New York Stock Exchange

US investors prefer their domestic market for small cap companies

However, pension funds and other asset owners remained structurally under-allocated to small cap equities, according to the consultancy.

This lack of exposure had been reinforced by two of the past decade’s key trends: the move from regional to global equity strategies and the shift towards passive investment.

Where investors using passive global broad market indices had additional small cap exposure, this was frequently confined to the domestic market, in particular for asset owners in the US and Australia.

Exposure to small cap stocks among active global equity funds 

bfinance small cap graph

Source: bfinance. Includes data from more than 100 active global equity funds.

See the February edition of IPE magazine for more on private equity