Remarkably, standing at the investment universe’s metaphorical cocktail bar, many investors have yet to indulge in one of its most delectable signature drinks. The full-bodied, well-integrated, and occasionally zesty blend of alpha and beta: small-capitalization equities, or “small caps.”
Even from the relatively neutral starting point of modern portfolio theory, for all its flaws — which suggests that rational, mean-variance-optimizing investors must hold the market portfolio — small caps should represent a nontrivial component of an investor’s equity allocation. But the case for small caps extends well beyond modern portfolio theory.
Investors commonly neglect a segment of the investment universe with one of the most promising amalgamations of alpha and beta: small-capitalization equities (small caps). This is remarkable given the opportunity for excess returns and diversification presented by actively managed small-cap exposure.
- Small caps offer compelling alpha opportunities, diversification, and potentially a return premium.
- Many investors have negligible exposure to small caps.
- Clients should consider a strategic allocation to active small-cap equity strategies.
Neglected or underappreciated by some, small-cap exposure can enhance an equity allocation’s risk/return profile, and should be a core building block within a diversified portfolio for many investors.
Mercer has identified and maintains coverage of a wide range of highly rated single country, regional, and global small-cap strategies. We also cover a broad range of highly rated regional and global all-cap strategies that offer varying degrees of small-cap exposure. Mercer has extensive experience in incorporating small-cap exposures within a globally diversified equity portfolio.
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