There are compelling reasons for Australian investors to select global small-cap equities as a complement to large- cap equities in a diversified strategic allocation according to a new research paper co-published by Douglas Funds Consulting Pty Ltd, Heuristic Investment Systems and Eaton Vance Management (International) (EVMI).
Nigel Douglas, Chief Executive Officer, of Douglas Funds Consulting Pty Ltd, drawing on statistical analysis by asset allocation specialist research firm Heuristic Investment Systems, carried out in-depth research as to why investors are directing their attention to global small-cap equities.
Among the key research findings:
- A standalone allocation to global small-caps of 5 per cent is justified for a typical ‘balanced’ Australian institutional portfolio (including large-cap global equities, emerging market equities and domestic small-cap equities) from a strategic asset allocation perspective, relative to other asset classes.
- There is a definite opportunity for active managers to add value given the breadth of investment opportunities.
- Global small caps ex Australia (in Australian dollar terms), on average, have outperformed global large caps by about 4.2 per cent a year over the past 15 years (to 29 January 2016) with their respective volatility not that dissimilar.
- The top quartile of investment managers in this asset class have consistently beaten the index by about 3 per cent (gross of fees) over 5 and 10 years with some highly ranked managers doing even better.