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Making A Case For Global Small Cap

2022-08-12, Kathleen Wylie

I’ve never been a fan of “fake it till you make it” so if there’s something I’m not knowledgeable about, I need to learn more before I attempt to talk about it. Prior to joinng QV Investors in June 2021, my main area of expertise was Canadian equity manager research. I spent a lot of time analysing the Canadian equity active management environment but had little experience with global strategies. When I joined QV and saw that we had launched the QV Global Small Cap Strategy in April 2021, I needed to analyse that space.


First on my to-do list was to understand the active management environment. Global small cap as an asset class has historically provided strong risk-adjusted returns, but I wanted to know if it was easy for active managers in that space to beat the benchmark. Like all asset classes, some years are more challenging than others, but our analysis showed the environment was favourable in 14 of the last 22 years based on data from the eVestment database. By favourable, we mean 50% or more of global small cap strategies beating the benchmark and a median return that is ahead of the benchmark. The chart below shows the percent of global small cap managers who have beat the benchmark back to 2000.

Source: eVestment

Also interesting is that the universe of global small cap managers is notably smaller when compared to global large cap managers. In eVestment, as of June 30, 2022, there were only 84 strategies in the global small cap universe compared to 641 in the global large cap universe and 627 in global all cap. Less competition in a strategy has historically led to higher value added. Looking back to 2000, the median global small cap manager return beat the median global large cap manager return on average by 367 basis points per year over the 22-year period. It’s worth noting that the higher value added over that period has come with only slightly higher volatility, so on a risk-adjusted basis, an investor would still get higher value added historically. We think this is very attractive.

To illustrate this point, the chart below shows the reward to risk ratio as calculated in eVestment for the global small cap equity universe median compared to the global large cap equity universe. This ratio is calculated by dividing the annualized return by the annualized standard deviation of the manager. It is essentially a measure of the trade-off between return and risk, so the higher the better.

Source: eVestment

Note that in 14 of 22 years, the global small cap equity universe reward to risk ratio beat the global large cap equity universe ratio. The differences in recent years have been small and not material.


So, with all that in mind, why did QV Investors launch this strategy? QV has a successful history of risk-managed investing with a 25-year track record in the QV Canadian Small Cap Strategy and 15 years in the QV Global Large Cap Strategy. It made sense from our perspective to combine our skillsets and launch the QV Global Small Cap Strategy, which will allow our clients to gain exposure to a broad universe of under-the-radar global businesses across developed markets. Our investment philosophy and approach to investing for this strategy is consistent with our other strategies. The QV Canadian Small Cap Strategy remains closed to new investors, but through the QV Global Small Cap Strategy, clients will get access to enhanced diversity in geography and industry through high quality global small cap opportunities that meet QV’s Seven Tests, which are key to our research process.


There is no question the QV Global Small Cap Strategy has benefitted from the value style of investing coming back into favour, but also from our expertise in small cap investing and disciplined approach. Since inception, our strategy has beat the benchmark in every quarter and beat peers in four of the first five quarters. We’re off to a good start as you can see from the chart below.

Source: eVestment

For those not yet invested in the strategy, it might be worth considering for diversification and the value-added potential.

All views and projections are the expressed opinion of QV Investors Inc. and are subject to change without notice. This Update is provided for informational purposes only. QV Investors takes no legal responsibility from any losses resulting from investment decisions based on the content of this Update.


Kathleen Wylie | Manager, Business Development & Client Relations

Kathleen is focused on expanding relationships on the institutional side of the business and ensuring QV’s clients receive exceptional service.