Half of small cap managers fail van Eyk review

An increasing number of small cap managers are introducing unwarranted performance fees, which are pushing up overall costs for investors in smaller company products, according to van Eyk.

Several managers were screened out of the researcher’s 2006 Australian small company review because it did not believe their offerings supported their high fee levels.

Commenting on the findings, van Eyk acting head of fund manager research Dr Jerome Lander said managers used performance fees to boost their revenue base, while their funds under management grew from a low level.

“We do not recommend small company managers charge hedge fund-like fees unless we know they are worth it,” he said.

Another revelation was that many small cap managers had large factor biases, which would affect relative performance more so than skill, especially over a short time period.

“For example, managers with a large industrials bias may strongly outperform if resources underperform, whereas a manager with a strong value and quality bias may predictably outperform in a down market,” Dr Lander said.

As part of its review, van Eyk assessed 22 managers based on their staff, processes and business management.

Only 11 managers made it through the formal screening process, six of which received a recommended rating.

A number of newer managers were eliminated due to concern over portfolio construction and risk management practises.

The review considered Australian fund managers with an exposure to smaller Australian companies, generally holding stock with a market capitalisation of between $100 million and $2 billion.