European Small Caps Hold Up Better in Troubled Times

European Small Caps Hold Up Better in Troubled Times
Smaller cap funds should consider a performance fee

May 2018, London. There is a strong case for buying European small-cap funds, and asset managers should be making it. So says the latest issue of The Cerulli Edge―European Monthly Product Trends, noting that smaller cap funds have weathered the storm of 2018 better than most other equity products, and provide an opportunity for active managers to discover hidden value.

In the U.K., the small-cap index has outperformed, albeit this is a case of having returned a smaller loss, says Cerulli Associates, a global research and consulting firm.

“If this trend continues, it may help counter the perception that small caps only outperform in a bull market,” says Angelos Gousios, director of European retail research at Cerulli.

He points to an ongoing study by S&P Global which confirms that small caps—in the short term at least—are more likely than most to outperform their benchmarks.

Noting that liquidity is a perennial issue for small caps, Cerulli says that closed-end vehicles may be part of the solution. As for open-end funds, some low-cost passive products are seeing rich pickings.

“To compete better with passives, active small-cap funds could consider cutting management fees, while charging a fee for outperforming the benchmark. When small-cap funds make spectacular gains, clients will be more willing to give up some of the upside than they are to pay chunky management fees for mediocre performance,” says Gousios.


Other Findings:

  • In the wake of February’s market volatility, March was European exchange-traded funds’ worst-performing month in more than two years, the latest available data shows. The market bled -€0.3 billion (-US$0.36 billion), its first outflows since February 2016, says, Cerulli. On the other hand, index funds gathered more than €3.8 billion of net new flows.
  • The European cross-border market posted net outflows of €1.9 billion in March, following net outflows of €20 billion the previous month. Money market funds were largely responsible, with net outflows of €14.6 billion in March, says Cerulli.

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