Investment Manager Skill in Small-Cap Equities

This study presents evidence of significant stock selection skill on a risk-adjusted basis for small-cap equity managers. Our results are robust across three distinct observation units - total fund return, portfolio holdings and daily trades. More importantly, the magnitude of performance generated by managers in our sample indicates superior managerial ability, from both a statistical and economic perspective (even after controlling for transaction costs). The average monthly alphas range between 59.6 and 76.1 basis points, while the cumulative abnormal returns (CARs) over a one-month period for holdings-based and transactions-based metrics are 59.7 and 64.1 basis points, respectively. Our research provides important out-of-sample evidence concerning the value of active management, in a market segment which exhibits both lower liquidity and analyst coverage. Paper download; www.eur.nl/fbk/dep/dep5/seminars