International Small Cap - A Distinct Asset Class?

Oct 1, 2007

The paper investigates if international small cap has been distinctly different from large caps and therefore deserved to be part of a policy benchmark. Our results indicated an increase in correlations between aggregated MSCI EAFE Small Cap and Standard Indexes in recent years. But the challenges in small cap investing have been different as the level of stock return dispersion has been larger than within the standard segment and decisions on country allocation had a bigger impact on portfolio performance within the small cap segment. We therefore conclude that an explicit allocation (or none at all) to international small cap would have provided additional diversification benefits during the period reviewed.