(Pictured: Alison Wallis)
The Melbourne-based Catholic Superannuation Fund has seeded an Australian-domiciled US micro-cap fund launched by local investment advisory firm Brookvine and US micro and small-cap manager Thomson Horstmann & Bryant (THB). A research note by Brookvine illustrates the unique nature of US micro-caps.
The CSF has invested $90 million in the new fund. Garrie Lette, the super fund’s CIO, said few institutional investors had a dedicated investment in US micro-caps, even though the universe consisted of about half of all the publicly traded companies. Incorporating them in a portfolio broadened the opportunity set and “with the benefit of time, should add to long-term returns”, he said.
The research note, written by Brookvine’s Alison Wallis, showed just how much micro-caps could add to returns over a long time period. Using Center for Research in Security Prices data the note shows that the 1,068 micro-caps in the 10th decile of all US listed stocks returned more than three times the value, compounded, of both small and mid-cap stocks since 1925. Micro-caps in total account for 1,500 stocks in the ninth and 10th deciles of the US stock markets.
Brookvine says US micro-caps cannot be compared with Australian stocks, even though they number about the same. The 1500 Australian micro-caps range in size from less than $1 million to about $500 million, whereas in the US they range from US$50 million to US$5 billion. The average US micro-cap has a value of about US$500 million.
Wallis’ paper says that in both markets, however, there is potential for active managers to generate outsized returns due to the lack of broker interest and the smaller amount of attention that micro-caps receive from large institutional investors. “This creates the market environment for discovering exceptional investment opportunities in this sector,” Wallis says.
Increased liquidity in the micro-cap sector has made it possible for big funds to make their investments without moving the market, she says, and automated trading has narrowed spreads and lifted trading volumes.
Wallis says: “This has created an opportunity for large investors to gain a strong first mover advantage by securing constrained capacity with top tier micro cap managers. Investors should identify managers with sufficient capacity and avoid those trading at excess capacity.”
Brookvine has represented THB in Australia and New Zealand since early this year, having done its own due diligence on the US firm last year. The micro-cap portfolio has about 115-120 names.