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The Small-Cap Advantage: How Top Endowments and Foundations Turn Small Stocks into Big Returns

ISBN: 978-0-470-61576-8
187 pages
February 2011
The Small-Cap Advantage: How Top Endowments and Foundations Turn Small Stocks into Big Returns (0470615761) cover image


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.

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Table of Contents



Chapter 1 The Small-Cap Advantage.

Two Sources of Outperformance.

Small-Cap Definitions.

The Outperformance of Small-Cap Stocks.

Outperformance within the Small-Cap Space.

Chapter Summary.

Chapter 2 Small-Cap Disadvantages.



The Small-Cap Graveyard and Reverse Survivorship Bias.

Capping Assets.

Chapter Summary.

Chapter 3 Small-Cap Investment Philosophy and Process.

Institutional Approach.

Passive and Enhanced Indexing in Small-Cap Stocks.

Active Management in Small-Cap Stocks.

Chapter Summary.

Chapter 4 Small-Cap Manager Organization.

Creating Value for the Manager.

Launching a Small-Cap Firm.

Investment Team.

Chapter Summary.

Chapter 5 The Fundraising Process.

General Marketing Strategy.

Institutional Clients.

Foundations and Endowments.

Consulting Firms.

Pension Plans.

High Net-Worth Individuals.

Wrap Fee and other Sub-Advisory Relationships.


Third-Party Marketers.

The Chicken-and-Egg Problem.

Chapter Summary.

Chapter 6 Fees, Agency Issues, and Other Performance Drags.

Common Performance Drags.

Frictional Costs in Small Caps.

Institution-Manager Agency Issues.

Agency Issues in Trading.

Benchmark Tyranny.

Commingled and Separate Accounts.

Chapter Summary.

Chapter 7 Small-Cap Managers and the Endowment Model.

The Endowment-Model Approach to Small Caps.

Finding an Edge.

Funding Smaller Managers.

Funding Emerging Managers.

Finding Emerging Managers.

Chapter Summary.

Chapter 8 Evaluating Small-Cap Managers.

Institutional Due Diligence Teams.

Assessing Manager Risk.

Assessing Investment Philosophy.

Analyzing a Manager's Process.

Evaluating Firm Principals.

Assessing Manager Operations.

Contributions and Withdrawals.

Chapter Summary.

Final Thoughts.


About the Author.


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Author Information

Brian T. Bares, CFA, is a research analyst with Bares Capital Management, Inc. He founded the firm in 2000 with the belief that concentrated portfolios of inefficiently priced small companies could lead to high relative compounding. His firm manages the institutional portfolios of small-cap and micro-cap common stocks in long-only, replicated separate accounts. Mr. Bares began his career by working his way up from the bottom. From compliance and operations, to trading and portfolio management, he garnered experience in nearly all aspects of running a boutique small-cap management company before starting his own company. He graduated from the University of Nebraska with a degree in mathematics. His investment philosophy and strategy have been profiled in Value Investor Insight and the Manual of Ideas: Portfolio Manager's Review. Mr. Bares holds the Chartered Financial Analyst designation and is a member of the CFA Society of Austin. He resides in Austin, Texas, with his wife and two sons.

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