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Hunting for alpha beyond global small cap equities

By: Catherine Yoshimoto, senior index product manager

Micro cap stocks have been a growing area of interest as investors seek to rebalance out of large cap equity exposure and to generate alpha from companies with less research coverage. Assets invested in active US and non-US micro cap equity strategies have increased about 20% per year over the two year period that ended December 31, 2017.[1]

Beyond the alpha potential, micro caps may provide diversification benefits due to their lower correlation to large cap equities, as the 5-year correlations of US equity market segments have shown.

FTSE Russell has launched the FTSE Global Micro Cap Index Series, which not only offers coverage of this market segment, but also extends the FTSE Global Equity Index Series (GEIS) reach to over 99% of the global investable universe. As shown below, the FTSE Global Micro Cap Index can be combined with the FTSE Global All Cap Index—which includes large, mid and small cap securities—to create the FTSE Global Total Cap Index. As the FTSE Global Micro Cap Index includes about 8,000 Developed and Emerging market constituents, the combined index broadens the investable opportunity set to about 15,800 securities. 

The FTSE Global Small/Micro Cap Index, which is created by combining the FTSE Global Small Cap Index[2] and the FTSE Global Micro Cap Index, is suitable for global small cap equity investment specialists researching securities that may eventually grow to become eligible for the FTSE Global Small Cap Index.

The roughly 8,000 securities in the FTSE Global Micro Cap Index are classified in 46 countries.[3] Although the FTSE Global Micro Cap Index includes over 2,300 securities in 22 Emerging market countries, 83% of the weight in the index is concentrated in the Developed markets, with the highest weights by FTSE GEIS region in North America, Asia Pacific ex Japan (Developed and Emerging), Developed Europe and Japan.

The highest ICB® Industry weights represented in the FTSE Global Micro Cap Index are Industrials, Financials and Health Care. The lowest weights represented are Telecommunications, Utilities and Oil & Gas, which tend to have higher weights in the large and mid cap FTSE All-World® Index. This is expected given many telecom, utilities and energy companies tend to be large conglomerates requiring significant investments in infrastructure.

The global micro cap segment is an area that’s relatively untapped and has potential for alpha generation. This is still a space where a skilled active manager can shine, and FTSE Russell now offers a comprehensive benchmark that represents this segment globally. It includes securities classified as Developed or Emerging that can be used to research opportunities, benchmark active managers and serve as a broader underlying universe for smart beta or sustainability indexes.

For more information on the construction of the FTSE Global Micro Cap Index Series, see the FTSE GEIS Ground Rules.

 

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[1] http://www.pionline.com/article/20180319/PRINT/180319866/microcaps-becoming-a-popular-source-in-hunt-for-alpha

[2] The target coverage of the FTSE Global Small Cap Index includes the smallest 90-98% of the FTSE Global All Cap Index, which includes 98% of the global investable universe. The FTSE Global Micro Cap Index coverage extends coverage to above 99% of the global investable universe.

[3] 47 countries are eligible for FTSE GEIS, however Czech Republic did not have eligible micro cap constituents as of the March 2018 index review.

 

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