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


"The historical advantages of small-caps as an asset class are well documented, but not realized by profit-maximizing managers who allow asset bloat, nor by institutions who follow their peers down the beaten path to invest with such managers. Brian Bares is willing to speak the hard truth about small-cap investing: market-beating returns are generated by managers who cap assets and concentrate."—Patrick Dorsey, Director of Equity Research, Morningstar; author, The Five Rules for Successful Stock Investing and The Little Book That Builds Wealth

"Brian Bares is the Warren Buffett of small and micro-cap stocks, and his book, The Small-Cap Advantage is a masterpiece of practical, Buffett-like wisdom. Whether you are a new investor or have been in the markets for decades, you will find this book full of insights!"—D. Ellen Shuman, VP and Chief Investment Officer, Carnegie Corporation of New York

"Brian Bares is a rare breed of professional investment manager. He excels in the requisite skills of investment acumen, hard work, and discipline while remaining philosophically grounded as a true 'clients first' fiduciary of his investors' capital. With The Small-Cap Advantage, Brian has written in a clear and accessible manner the most comprehensive 'how to' book available for anyone interested in becoming a small-cap manager, or hiring one."—Thruston Morton, CEO and CIO, Global Endowment Managements

A world-renowned money manager shares winning strategies for small-stock investing

Bigger is not better. 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. In The Small-Cap Advantage: How Top Endowments and Foundations Turn Small Stocks into Big Returns, Bares reveals 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 this asset class.

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.



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.