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The Small-Cap Advantage: How Top Endowments and Foundations Turn Small Stocks into Big Returns
John Wiley and Sons Ltd, Feb 2011, Pages: 208
A world-renowned money manager shares winning strategies for small-stock investing
Since forming Bares Capital Management, Inc. in 2000, Brian Bares has shown that above average returns can be generated through the careful selection of small company common stocks. Additionally, he's shown how concentrating capital in a handful of ideas improves the potential for outperformance by increasing the depth of knowledge of each position and allowing each security to have a more meaningful impact on the portfolio. In The Small-Cap Advantage: How Top Endowments and Foundations Turn Small Stocks Into Big Returns, Bares describes how endowment-model investors and aspiring managers can gain meaningful exposure to small stocks while sidestepping many of the obstacles that have historically prevented institutional investment in the asset class. The book also
- Details the historical outperformance of small-cap stocks
- Contrasts the various strategies employed by managers in the space
- Explains how aspiring managers can structure a firm to boost performance and attract institutional capital
- Describes how endowment-model institutions can evaluate and engage outside managers for their small-cap allocations
- Summarizes important topics such as liquidity and the research process
Bigger is not better. The Small-Cap Advantage reveals that small stocks have historically performed better than large ones, and that lack of competition in small-cap stocks provides diligent managers with a singular opportunity to outperform.
The Small-Cap Advantage encompass two broad topics that are interrelated. It will discuss the advantages and challenges of actively managing small cap securities. It also discusses how endowment model institutions (think Yale) can evaluate and engage outside managers for their small cap allocations. It discusses the pros and cons of various strategies in the small cap space, and details how these varying strategies would fit into a modern endowment model portfolio.
The main themes of the book that will be touched on throughout are:
- Small caps are priced more inefficiently, and thus offer opportunity for outperforming benchmark indices
- Endowment model investors must seek out areas of inefficiency in their constant struggle to outperform their peers
The book provides information for sophisticated investors at an accessible level. It will focus on the practical:
- How does the small-cap manager deal with illiquidity on the trading desk?
- What is the best way to structure an investment team?
- Is concentration a good portfolio decision? How would an institution evaluate the risk controls of a boutique small-cap manager?
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