Renewed Optimism for Small-Cap Funds?

As of June 2024, assets under management (AUM) in small-cap funds across all domiciles stood at USD 1.33 trillion, a 50% increase over Dec. 31, 2018, driven by capital appreciation rather than inflows. Net outflows for the period amounted to USD 42 billion. Over the same period, global small caps (MSCI ACWI Small Cap Index) underperformed larger caps (MSCI ACWI Index), returning 9.9% versus 13.3%, respectively.

Actively managed AUM higher, but for how long?

When we compared active versus indexed small-cap funds, two key observations emerged. First, although actively managed funds accounted for a majority (about 59%) of total AUM at the end of June 2024, this percentage was down from 69% at the end of 2018. One explanation for the greater proportion of active funds could be that, compared to larger caps, the small-cap universe tends to offer broader alpha opportunities for active managers.

Our second observation is that although small-cap indexed funds have consistently attracted inflows from investors, active funds have struggled to do so. In 2021, indexed funds’ net inflows far surpassed those of active funds at USD 43.4 billion versus USD 2.2 billion. In all other years over our analysis period, small-cap active funds had net outflows, with the largest in 2022, a net drain of USD 54.2 billion.

The net inflows into all small-cap funds, both active and indexed, were positive over the first six months of 2024, and have been net positive over the longer period. Funds with exposure to U.S. small caps, representing approximately 70% of the AUM in our analysis, have had net positive inflows since 2023. Although early days, if the consistent inflows continue, it could indicate a renewed optimism and interest in the small-cap segment.