After last year's hot performance, U.S. institutional interest has begun stirring in long-overlooked non-U.S. small-capitalization stocks.
Sources say the pension fund of NYNEX Corp., New York, is among the more prominent institutional investors now searching for international small-cap managers. NYNEX officials would not comment.
Late last year, the international equity fund of The Investment Fund for Foundations hired Warburg Investment Management International, London, for small-cap European equities.
Recent hires of Bee & Associates, a global small-cap equities manager based in Denver, are: the Clark Foundation, New York; the pension fund of Sutherland Lumber Co., Kansas City, Mo.; and the Denver Botanic Gardens Foundation, according to Edward McMillan, a principal of Bee.
Sources say Cambridge Associates, Cambridge, Mass., is recommending the category to its clients. Cambridge executives wouldn't comment.
Callan Associates Inc., San Francisco, stops short of recommending foreign small-cap stock investing but lists the strategy as "on the burner" in terms of investor interest.
Among the attractions Callan officials point out: for the eight years ended Dec. 31, the FT-Actuaries' World Excluding the U.S. Small Cap Index posted a 324.4% cumulative total return.
That index outperformed the Morgan Stanley Capital International Europe Australasia Far East Index in dollars, which returned 299.3%; the Standard & Poor's 500 Stock Index, which gained 286.5%; and the Callan Small Cap Index, which advanced 276.4%.
After nosing out the EAFE index last year, international small-cap stocks' overall performance was 10 percentage points higher than EAFE's for 1994 through March 14, according to Dimensional Fund Advisors, Santa Monica, Calif.
The rebound after laggard performance in 1991 and 1992 was in step with expectations for world economic improvement. Extra sensitive to business cycles, international small-cap stocks "lose more in recessions and advance faster (than large-cap stocks) in periods of economic advance," said David Booth, DFA's president.
Future prospects for international small-cap stocks "depend on what people think of (world) economies.
If the business cycle stays strong for a while, small stocks should stay strong. If expansions are short, small caps will (retreat) quickly," Mr. Booth said.
While prices of international small caps are now what he calls "fairly" valued, the sector is still advancing.
On the downside, investors cite thin trading liquidity on these stocks and higher transaction costs. Some wonder about which benchmark properly measures the sector's performance.
On the other hand, proponents tout the fact these stocks haven't been as combed over as their large-capitalization cousins. The stocks themselves haven't been as scrutinized by analysts, and investors' money hasn't yet poured into the sector.
But money managers and others see interest rising.
"We're having discussions with several large (unnamed) corporate plans now," said Mr. McMillan of Bee & Associates.
He touts Bee's performance. For the 43/4 years since Bee's inception, through Dec. 31, the firm posted a compound annual return of 20.3%, vs. 3.7% for the MSCI World Index and 10.4.% for the S&P 500, he said.
Foreign small-cap stock had been overlooked as a subset of international investing, partly because emerging markets seized the limelight in recent years.
But by last fall, interest already was on the rise when Greenwich Associates, Greenwich, Conn., found 45 of 2,083 large pension funds surveyed expected to hire a small-cap international specialist in 1993. Another 15 already had.
In 1992, 15 funds expected to hire a specialist for the category, and five had done so.
Esther Cash, vice president of the Charlottesville, Va., Investment Fund for Foundations, said her organization hired an international small-cap manager - a European stock specialist - because fund officials desired a broad international reach.
"This is not only true for our international fund, but for our U.S. holdings too. In the U.S., we're using the Wilshire 5000 as our benchmark, not the S&P 500," she said.