CHICAGO -- Northern Trust Quantitative Advisors is starting an institutional small-capitalization value portfolio that will contain 1,000 companies, a strategy that executives say will eliminate the need to cap the product anytime soon.
NTQA has about $370 million in small-cap now, primarily in mutual funds. Its new collective fund for U.S. institutional tax-exempt clients already has garnered $30 million from five current clients.
"Our focus on characteristics, as opposed to individual stocks, means we can operate this strategy with $3 billion," said NTQA's small-cap portfolio manager Susan French.
A number of small-cap portfolios have closed to new investors in recent years after total assets exceeded a certain level. If the portfolio manager holds 35 stocks in the portfolio and has $1 billion to work with, the manager's position in the small companies can become quite large. Trading big blocks of stock in a small company can impact the price of the shares, so small-cap portfolio managers often close the portfolio to new investors to maintain positions.
And since keeping transaction costs low is a critical component in successful small-cap investing, trading fewer shares keeps costs down, Ms. French said.
"Small-cap choices are more limited than three or four years ago," said Jeff Nipp, head of manager research at Watson Wyatt Investment Consulting, Atlanta. "If a small-cap (product) has been successful at all, it may be closed or is close to closing."
Ms. French said NTQA was approached by several current clients in need of a small-cap institutional vehicle. "And we sensed the demand, with good small-cap managers closing because of implementation problems," she said.
She has been Northern Trust Co.'s small-cap manager since the bank's asset management division first launched the asset class in 1994. She keeps a large number of companies in the portfolio because she believes it increases her chances of "capturing the effect." And there is practice behind the theory.
In this year's first quarter, the NTQA small-cap composite return was 10.11%; the Russell 2000 index benchmark returned 10.06%. Turnover in the portfolio is between 16% and 20%.
Although small-cap portfolios vary in the number of stocks they contain, 1,000 is on the high end, Mr. Nipp said.
The portfolio will mimic the sector weightings of the Russell 2000 index benchmark, which is about 25% financial services, 17% consumer discretionary, 12% technology, 10% health care and others.
Minimum investment for institutions is $5 million to $10 million; separately managed accounts have a minimum investment of $20 million.
Small cap is an excellent option for investors concerned about the overvaluation of large-capitalization stocks, said John Goodwin, chief investment officer of NTQA.
Even though the Russell 2000 increased more than 10% during the first quarter of this year, the Standard & Poor's 500 returned 13.37% for that period, beating the small-cap index by 3.31%
Also, the performance of small-cap growth continues to beat the results of small-cap value. The Russell 2000 Growth Index returned 11.88% in the first quarter, compared with the 8.35% of the Russell 2000 Value Index, according to Pensions & Investments' Performance Evaluation Report.
NTQA manages about $30.8 billion in total assets, of which about $27 billion is U.S. institutional tax-exempt. It provides domestic, international and global equity investment service, as well as domestic fixed income. It is a unit of multiproduct manager Northern Trust, Chicago, which manages nearly $200 billion in total assets.