• UK Insurer
  • 2023
  • Public Equity (Small Cap), Global
  • USD 50 million
  • Pooled fund, Irish or UK domicile, daily dealing
  • Manager research
  • At least 2% p.a. (net of fees) outperformance over benchmark

Our specialist says:

The global small cap manager universe is unique in its high manager turnover from search to search. Successful strategies face the inevitable challenge of capacity as performance and asset growth constrains liquidity, ownership stakes and nimbleness in accessing smaller cap opportunities. We want to see managers exercising capacity discipline to preserve investment integrity and alpha generation potential for existing investors – but it means we must also work hard to find the next wave of up-and-coming small cap managers for investors.
  • >200Considered
  • 25Long List
  • 12Shortlisted
  • 6Finalists
  • 1Selected

Client-Specific Concerns

This investor was making their first allocation to global small-cap equities and willing to consider any investment approach (systematic or discretionary) and any style, with a preference for an unconstrained investment mindset rather than benchmark-relative positioning.

The mandate sought to introduce a differentiated market cap exposure to the investor’s equity portfolio, to complement existing large cap and all cap manager allocations. In the context of a bleaker global economic outlook, the high alpha potential (and potential nimbleness of smaller businesses in adapting to inflationary prices) was particularly appealing.

This global remit reflects a trend that bfinance has observed among investors, who are increasingly taking a global rather than a regional investment approach in this asset class: geographical allocation decisions are increasingly likely to be delegated to investment managers rather than pre-determined via dedicated regional or country-specific mandates (typically with a historic home bias).

The insurer wanted to gain understanding of broad range of styles within the small cap space, including value strategies (despite a period of underperformance resulting from style headwinds) and explicit ‘impact’ or ‘sustainable’ approaches.

Minimum ESG requirements for managers included firm policies, engagement and strategy integration, a preference for certain norms and industry-based exclusions, and an expectation of fund reporting on ESG. As an insurer with a long term investment horizon, consideration of climate change and Net Zero alignment was also viewed as an advantage.


  • Maximising choice: Since this was the investor’s first time entering small cap equity, they wanted to consider a variety of different styles within the space. The process provided visibility on an exceptionally broad range of managers, with well over 200 under consideration. That diversity was maintained through the process: the twelve shortlisted strategies included value, quality, growth, impact, style-agnostic and other approaches.
  • Understanding managers' resources: The inherent inefficiencies in information on (and access to) smaller companies mean that the majority of managers take a fundamental research approach. As such, ‘boots on the ground’ resources can represent a particular strength when assessing managers’ capabilities. Although the investor was open to both systematic and discretionary approaches, fewer than 20% of proposals received for this mandate described themselves as pure systematic or ‘combined’ approaches.
  • Examining 'capacity discipline': The investor was expecting a certain level of institutional scale and experience from prospective managers. Excessive asset growth can cause particular problems in this sector: size can constrain portfolio managers from accessing smaller opportunities, delay investment and divestment, and force managers to drift from pure small cap into the SMID space. Researchers explored whether those strategies with scale were managing their risks appropriately, including: reviewing strategy growth over time, looking at liquidity parameters at different scenario asset levels, and interrogating stock size at purchase as well as sell discipline.
  • Assessing ESG approaches: The research process provided a clear view on managers’ ESG credibility and strategy, including their willingness to work with the insurer as an ESG partner over the long term, as they expected their approach to deepen and evolve. Pooled fund investments can provide less scope for client customisation than segregated mandates, especially with respect to preferred exclusions, but a number of managers were identified that were willing to customise propositions to the investor’s specific ESG needs such as seeding new customised fund vehicles with ‘darker green’ ESG credentials.
  • Exploring impact investment: The investor did not require an ‘impact’ or ‘sustainable’ strategy but was keen to consider whether this could be achieved in a small cap mandate. There are compelling reasons to consider small and mid-cap companies as ripe hunting ground for impact strategies. (Many innovative pioneers are at this early stage of development. High-impact business lines are unlikely to be diluted by other company activities, as can happen in large conglomerates. Small firms may permit better access to management, facilitating active engagement.) We explored this possibility, and several small cap oriented impact strategies were indeed included in the search review process. However, small cap strategies represent only a small fraction of the global impact manager universe: the majority of impact strategies are all cap with a SMID component or large cap in nature (perhaps to maximise appeal to potential investors and permit greater AUM growth). Ultimately, the selected strategy was not an impact mandate, but the investor may consider a separate future allocation to the impact space instead.


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