Smaller Managers More Nimble in Volatile Markets: Northern Trust

Smaller investment firms deliver stronger returns and better downside protection in volatile markets than larger firms when investing in U.S. large-cap stocks, Northern Trust found.

“Our new study indicates that emerging managers may help investors squeeze more out of their most important, and most challenging, asset class,” said Ted Krum, investment program manager in the program solutions group at Northern Trust Global Investments.

“Despite market declines and portfolio reallocations, U.S. equities still make up the largest portion of many institutional client accounts, making this asset class a key driver of performance for institutional investors,” Krum said.

Northern Trust found that the median smaller investment manager with less than $3.6 billion under management outperformed the median large firm by 72 basis points a year over the past five years.

Over the past five years, smaller managers’ large-cap equity portfolios gained an average of 67 basis points a year, whereas the S&P 500 Index declined an average of 80 basis points a year in this timeframe, Northern Trust Found. And in five of the eight bear market quarters over the past five years, smaller managers outperformed the S&P 500 by a cumulative 3.65%--the best result of the groups studied.

“These results suggest that clients can increase their chances of hiring a potential winner by expanding their search into the emerging universe,” said Investment Program Manager John McCareins.