A world-renowned money manager shares winning strategies for small-stock investing Since forming Bares Capital Management, Inc. in 2000, Brian Bares has shown that above average returns can be generated through the careful selection of small company common stocks. Additionally, he's shown how concentrating capital in a handful of ideas improves the potential for outperformance by increasing the depth of knowledge of each position and allowing each security to have a more meaningful impact on the portfolio. In The Small-Cap Advantage: How Top Endowments and Foundations Turn Small Stocks Into Big Returns, Bares describes how endowment-model investors and aspiring managers can gain meaningful exposure to small stocks while sidestepping many of the obstacles that have historically prevented institutional investment in the asset class. The book also Details the historical outperformance of small-cap stocks Contrasts the various strategies employed by managers in the space Explains how aspiring managers can structure a firm to boost performance and attract institutional capital Describes how endowment-model institutions can evaluate and engage outside managers for their small-cap allocations Summarizes important topics such as liquidity and the research process Bigger is not better. The Small-Cap Advantage reveals that small stocks have historically performed better than large ones, and that lack of competition in small-cap stocks provides diligent managers with a singular opportunity to outperform.

Table of Contents:
Introduction xiii Acknowledgments xvii CHAPTER 1 The Small-Cap Advantage 1 Two Sources of Outperformance 1 Small-Cap Definitions 2 The Outperformance of Small-Cap Stocks 10 Outperformance within the Small-Cap Space 15 Chapter Summary 19 CHAPTER 2 Small-Cap Disadvantages 21 Research 21 Trading 23 The Small-Cap Graveyard and Reverse Survivorship Bias 28 Capping Assets 29 Chapter Summary 31 CHAPTER 3 Small-Cap Investment Philosophy and Process 33 Institutional Approach 33 Passive and Enhanced Indexing in Small-Cap Stocks 34 Active Management in Small-Cap Stocks 36 Chapter Summary 70 CHAPTER 4 Small-Cap Manager Organization 71 Creating Value for the Manager 71 Launching a Small-Cap Firm 72 Investment Team 86 Chapter Summary 94 CHAPTER 5 The Fund-Raising Process 95 General Marketing Strategy 95 Institutional Clients 98 Foundations and Endowments 104 Consulting Firms 105 Pension Plans 108 High-Net-Worth Individuals 112 Wrap Fee and Other Subadvisory Relationships 114 Databases 115 Third-Party Marketers 116 The Chicken-and-Egg Problem 118 Chapter Summary 119 CHAPTER 6 Fees, Agency Issues, and Other Performance Drags 121 Common Performance Drags 121 Frictional Costs in Small Caps 124 Institution-Manager Agency Issues 129 Agency Issues in Trading 131 Benchmark Tyranny 133 Commingled and Separate Accounts 134 Chapter Summary 138 CHAPTER 7 Small-Cap Managers and the Endowment Model 139 The Endowment-Model Approach to Small Caps 139 Finding an Edge 142 Funding Smaller Managers 145 Funding Emerging Managers 147 Finding Emerging Managers 149 Chapter Summary 151 CHAPTER 8 Evaluating Small-Cap Managers 153 Institutional Due Diligence Teams 153 Assessing Manager Risk 155 Assessing Investment Philosophy 158 Analyzing a Manager’s Process 159 Evaluating Firm Principals 167 Assessing Manager Operations 169 Contributions and Withdrawals 172 Chapter Summary 174 Final Thoughts 175 Notes 177 About the Author 183 Index 185