DARIEN, Conn. — Institutional investors are allocating significantly more to smid-cap and midcap funds as more small-cap funds close to new investors, according to a report by Casey, Quirk & Associates LLC, Darien, Conn.
"I think there's evidence here that plan sponsors are comfortable with these (smid-cap and midcap) managers and allowing them to move up, past the barrier of the $2 billion mark" where small-cap funds are usually capped, said Z. Christian Strzelecki, senior associate and co-author of the report, "Small Cap Spillover: New Approaches Address Capacity Issues,"
Mr. Strzelecki said the biggest surprise is the extent that small-cap capacity problems have directly benefited other asset classes. "This is the first time we came across such a clear link between capacity constraints in small cap leading to growth in smid and midcap," he said.
Small-cap equity has been a winning asset class for investors. The small-cap Russell 2000 Index registered a 4.85% gain in March and finished the first quarter 2006 up 13.94%. The positive performance was evenly distributed among growth and value stocks as the Russell 2000 Growth index led Russell's family of 24 U.S. indexes with a 4.86% increase in March, along with a 4.15% in the first quarter; while the Russell 2000 Value Index gained 4.84% and 4.71%, respectively. The S&P 500 returned 1.11% in March and 2.08% in the first quarter.
But with that success comes capacity constraints as more small-cap mutual funds close to new investors.
According to data gathered by InvestorForce Inc., Wayne, Pa., as of Sept. 30, there were 49 small-cap equity funds each with $2 billion or more in assets, up from 19 three years ago. And 32 of those 49 are now closed to new investors.
Yariv Itah, senior associate at Casey, Quirk, said midcap and smid-cap classes have seen considerable asset growth over the last three years; midcap grew 103% and smid-cap grew 120%.
Investors are also attracted to smid-cap and midcap funds as a source for alpha, Mr. Itah said. "By and large, these markets are seen as more efficient than the large-cap market. It's very hard to find alpha in the large-cap universe. It's easier to find the gem in smid and small. There's just more opportunity for alpha," he said.