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Investment manager skill in small-cap equities

Author

Listed:
  • Cong Chen

    (Macquarie Bank, Sydney)

  • Carole Comerton-Forde

    (Discipline of Finance, Faculty of Economics & Business, The University of Sydney)

  • David R. Gallagher

    (School of Finance and Economics, University of Technology, Sydney and Capital Markets CRC Limited, david.gallagher@uts.edu.au)

  • Terry S. Walter

    (School of Finance and Economics, University of Technology, Sydney)

Abstract

Using a representative sample of monthly portfolio holdings and daily trades, this study presents unique evidence of significant stock selection skill amongst institutional small-cap equity managers on a risk-adjusted basis. Of particular importance is the magnitude of the performance generated by fund managers in our sample. Aggregate four-factor and five-factor alphas are 68 and 59.6 basis points per month before management expenses and tax, respectively. The evidence from holdings and transaction-based metrics of performance also reveals that small-cap equity managers possess superior stock selection ability, from both a statistical and economic perspective. Our results are robust to the deduction of transaction costs. Our research provides important non-U.S. evidence concerning the value of active management, in a market segment which exhibits both lower liquidity and lower analyst coverage.

Suggested Citation

  • Cong Chen & Carole Comerton-Forde & David R. Gallagher & Terry S. Walter, 2010. "Investment manager skill in small-cap equities," Australian Journal of Management, Australian School of Business, vol. 35(1), pages 23-49, April.
  • Handle: RePEc:sae:ausman:v:35:y:2010:i:1:p:23-49
    DOI: 10.1177/0312896209354216
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    References listed on IDEAS

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    Cited by:

    1. Robert E. Marks, 2010. "Welcome to SAGE Publications," Australian Journal of Management, Australian School of Business, vol. 35(1), pages 3-5, April.
    2. Carole Comerton‐Forde & David R. Gallagher & Joyce Lai & Terry Walter, 2011. "Broker recommendations and Australian small‐cap equity fund management," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 51(4), pages 893-922, December.
    3. Cao, Ying & von Reibnitz, Anna & Warren, Geoffrey J., 2020. "Return dispersion and fund performance: Australia – The land of opportunity?," Pacific-Basin Finance Journal, Elsevier, vol. 60(C).
    4. Carole Comerton-Forde & David R. Gallagher & Jumana Nahhas & Terry S. Walter, 2010. "Transaction costs and institutional trading in small-cap equity funds," Australian Journal of Management, Australian School of Business, vol. 35(3), pages 313-327, December.
    5. Zhe Chen & F. Douglas Foster & David R. Gallagher & Adrian D. Lee & Steven Cahan, 2015. "A model of emulation funds," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 55(3), pages 717-748, September.
    6. Zhe Chen & F Douglas Foster & David R Gallagher & Adrian D Lee, 2013. "Does portfolio emulation outperform its target funds?," Australian Journal of Management, Australian School of Business, vol. 38(2), pages 401-427, August.
    7. Scott Bennett & David R Gallagher & Graham Harman & Geoffrey J Warren & Lihui Xi, 2016. "Alpha generation in portfolio management: Long-run Australian equity fund evidence," Australian Journal of Management, Australian School of Business, vol. 41(1), pages 107-140, February.

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