A world-renowned money manager shares winning strategies for small-stock investing Since forming Bares Capital Management, Inc. in 2000, Brian Bares has shown that above average returns can be generated through the careful selection of small company common stocks. Additionally, he's shown how concentrating capital in a handful of ideas improves the potential for outperformance by increasing the depth of knowledge of each position and allowing each security to have a more meaningful impact on the portfolio. In The Small-Cap Advantage: How Top Endowments and Foundations Turn Small Stocks Into Big Returns, Bares describes how endowment-model investors and aspiring managers can gain meaningful exposure to small stocks while sidestepping many of the obstacles that have historically prevented institutional investment in the asset class. The book also
- Details the historical outperformance of small-cap stocks
- Contrasts the various strategies employed by managers in the space
- Explains how aspiring managers can structure a firm to boost performance and attract institutional capital
- Describes how endowment-model institutions can evaluate and engage outside managers for their small-cap allocations
- Summarizes important topics such as liquidity and the research process
Bigger is not better. The Small-Cap Advantage reveals that small stocks have historically performed better than large ones, and that lack of competition in small-cap stocks provides diligent managers with a singular opportunity to outperform.
Table of Contents:
Introduction xiii
Acknowledgments xvii
CHAPTER 1 The Small-Cap Advantage 1
Two Sources of Outperformance 1
Small-Cap Definitions 2
The Outperformance of Small-Cap Stocks 10
Outperformance within the Small-Cap Space 15
Chapter Summary 19
CHAPTER 2 Small-Cap Disadvantages 21
Research 21
Trading 23
The Small-Cap Graveyard and Reverse Survivorship Bias 28
Capping Assets 29
Chapter Summary 31
CHAPTER 3 Small-Cap Investment Philosophy and Process 33
Institutional Approach 33
Passive and Enhanced Indexing in Small-Cap Stocks 34
Active Management in Small-Cap Stocks 36
Chapter Summary 70
CHAPTER 4 Small-Cap Manager Organization 71
Creating Value for the Manager 71
Launching a Small-Cap Firm 72
Investment Team 86
Chapter Summary 94
CHAPTER 5 The Fund-Raising Process 95
General Marketing Strategy 95
Institutional Clients 98
Foundations and Endowments 104
Consulting Firms 105
Pension Plans 108
High-Net-Worth Individuals 112
Wrap Fee and Other Subadvisory Relationships 114
Databases 115
Third-Party Marketers 116
The Chicken-and-Egg Problem 118
Chapter Summary 119
CHAPTER 6 Fees, Agency Issues, and Other Performance Drags 121
Common Performance Drags 121
Frictional Costs in Small Caps 124
Institution-Manager Agency Issues 129
Agency Issues in Trading 131
Benchmark Tyranny 133
Commingled and Separate Accounts 134
Chapter Summary 138
CHAPTER 7 Small-Cap Managers and the Endowment Model 139
The Endowment-Model Approach to Small Caps 139
Finding an Edge 142
Funding Smaller Managers 145
Funding Emerging Managers 147
Finding Emerging Managers 149
Chapter Summary 151
CHAPTER 8 Evaluating Small-Cap Managers 153
Institutional Due Diligence Teams 153
Assessing Manager Risk 155
Assessing Investment Philosophy 158
Analyzing a Manager’s Process 159
Evaluating Firm Principals 167
Assessing Manager Operations 169
Contributions and Withdrawals 172
Chapter Summary 174
Final Thoughts 175
Notes 177
About the Author 183
Index 185
About the Author :
BRIAN T. BARES, CFA, is a research analyst with Bares Capital Management, Inc. He founded the firm in 2000 with the belief that concentrated portfolios of inefficiently priced small companies could lead to high relative compounding. His firm manages the institutional portfolios of small-cap and micro-cap common stocks in long-only, replicated separate accounts. Mr. Bares began his career by working his way up from the bottom. From compliance and operations, to trading and portfolio management, he garnered experience in nearly all aspects of running a boutique small-cap management company before starting his own company. He graduated from the University of Nebraska with a degree in mathematics. His investment philosophy and strategy have been profiled in Value Investor Insight and the Manual of Ideas: Portfolio Manager's Review. Mr. Bares holds the Chartered Financial Analyst designation and is a member of the CFA Society of Austin. He resides in Austin, Texas, with his wife and two sons.
