The CFA annual conference was held in Chicago and the program took full advantage of the local talent. That included presentations from several faculty members of the University of Chicago Booth School. Plus, there was a sponsored presentation by The Center for Research in Security Prices (better known as CRSP), a Booth entity that is a key source for historical market data for academics and practitioners.
The first part of the session was about the “puzzling” popularity of active management (based upon this research). The remainder concerned a new series of “investable” market cap indexes from CRSP. The back-tested data was striking. Since the start of 2001 to the end of this March, the mega cap index delivered 1.69% (annualized), and the returns went up in monotonic fashion as the cap size went down. The micro cap return was 8.38% per annum. Alas, the CRSP data set is not public, so I was not able to do a chart, but you can look at the returns and the methodology that differentiates the CRSP approach from others via a PDF that it has provided.
The chart above examines the roughly one percent of the U.S. market that is composed of micro cap stocks. I had the opportunity to meet Rick Ferri at the conference (and to dine with Bob Seawright, Tadas Viskanta, and him). Ferri, a thought leader in the world of index investing, wrote a piece for Forbes in early 2010 on investability in the micro cap world (in light of the lagging performance of mutual funds and ETFs versus micro cap indexes during 2009). We’ll see whether the CRSP index and any related ETF can move the needle on that score.
From Ferri’s article, I used the Wilshire Micro Cap Index and the Bridgeway Ultra-Small Company Market Fund (BRSIX) in today’s chart. In addition, I added three funds with “micro cap” in their names, from Royce (RYOTX), Oberweis (OBMCX), and Managers (MMCFX). Quite a dispersion — and not just in performance. According to Bloomberg, the funds range in size from $19 million in assets to $1.2 billion, and the average market cap of the fund holdings from $173 million to $662 million (but the lowest and highest of each of those numbers don’t match up as you’d expect). Given the incredible round trip of the returns for micro cap stocks through 2008, it would be helpful to look carefully at the “investor returns” over this period. Many micro cap funds gave investors big tax bills just at the time when performance was the worst; some lost significant assets as a result of that double drubbing.
At an investment gathering like the CFA conference, there is an intersection of ideas and interests: theory and practice, active and passive, the industry and the profession, the marketing of products and the management of them, and what’s “investable” in good times and bad. Even when looking at this sliver of one percent of the U.S. market, each of those dimensions tells a story about the investment world.
This is the penultimate posting in a long series about the CFA annual conference.
A brief but very important part of the conference was a call to action from John Rogers, CEO of CFA Institute. The investment industry is “at a fork in the road” and it’s time for investment professionals to walk the right path. (By the way, this was the 500th posting that I have done, counting the research puzzle and pix.)