Construction Issues in Emerging Market Small Cap Indexes
Increasingly, investors are looking to invest in emerging market small-cap equities as a separate allocation in their portfolios. This decision is to some degree motivated by the desire to capture a “small-cap premium”, the well-known theoretical notion that smaller capitalisation stocks show persistent outperformance versus large capitalisation stocks. While the definition of “small” is quite tractable in a single country context, its meaning becomes less precise in a multi-country setting – is one looking to invest in the smallest companies in each emerging market country, or the smallest companies in the entire emerging markets universe? The answer to this seemingly simple question can have significant implications as to the exposure one is attempting to target.