As was mentioned previously, small-cap pursuit is achieved in numerous ways. Several multi-product mega-firms (with both balanced and specialty capabilities) operating globally have pioneered design of pension investment styles based on comprehensive capital market research. This includes innovative approaches to small-cap investing. One leading, American-based mega-firm with a Canadian office offering asset management and advisory services to pension funds recommends investment modes to clients interested in this field. Such modes are designed to meet the particular needs and constraints of individual pension funds by combining different public equity stocks. Each mix is determined by stock weightings diversified according to size and according to type, such as growth and value stocks or the two blended together.^{Endnote 91}

The route taken to public equity investing will depend, of course, on the relative risk tolerance of fiduciaries at a given pension fund as well as their aims for cost-adjusted and risk-adjusted returns (see Investing And Managing Pension Assets in Canada). Some may adopt a passive strategy. Alternatively, others may be more active, but keep small-caps at the margins of portfolios. Still others may aim to "beat the market" and devote considerable resources to more aggressive participation in stock-picking.

This latter route entails use of specialists, situated internally or externally, to handle the information- intensive and management-intensive tasks of growth and/or value small-cap investing, and that can add value. In practice, many pension funds spread their small-cap asset allocations across a number of managers and pools exhibiting diverse investment styles and targets.

It was noted before that there are currently no Canadian aggregate statistics as yet confirming total pension investment in the low-capitalization end of public securities exchanges. The American-based mega-firm cited above reports that approximately 80 percent of its clients invest in small-cap stocks and that exposure for these averages about 5 percent of total portfolio holdings (though some clients will go as high as 10 percent). Naturally, exposure tends to rise with experience in this special sub-class of public equity assets.^{Endnote 92}

Such estimates cannot be viewed as the norm in the broader Canadian universe of pension funds, however. For many governing and managing fiduciaries interviewed by the CLMPC, 5 percent exposure to small-caps is the absolute maximum from a prudential perspective and very few funds, even among the most sizeable, are believed to have reached this threshold. Indeed, some large funds hold little or no small-cap stocks.^{Endnote 93}

In 1997-98, PIAC began gathering information on the small-cap holdings of its membership. This has proved to be a challenging endeavour, initially, considering that much of this sort of investing is indirect and undifferentiated in large Canadian public equity pools administered by external balanced managers. The PIAC database, unpublished to date, is based on estimates of holdings in TSE 200 and Nesbitt Burns stocks and may eventually provide a definitive snapshot of the acknowledged billions of pension dollars flowing in this direction.^{Endnote 94}

Responses from pension managers, market analysts and practitioners in CLMPC interviews suggested that pension participation may be especially vital to small-cap investment activity over time. As these stocks are predominantly illiquid, due to thin trading, and their out-performance of large-caps occurs over the long-term, investors must be patient. Due to low turnover in their public security holdings, pension funds reportedly exhibit more patience in exchanges than other institutional investors, such as mutual funds. When small-caps approach the end of a cycle, or otherwise show price volatility, pension funds are less likely to pull-out altogether than other investor groups. Instead, they tend to adjust by re-balancing the weighting of these assets in overall allocations.

A by-product of patience is the commitment pension funds have to enhancing shareholder value. Fund leverage as a significant minority owner is perhaps best illustrated in relation to blue chips and high profile governance issues pertaining to the roles, powers and decision-making of TSE 35 corporate boards of directors and managers.

Pension shareholder dispositions to such issues (some fiduciaries have articulated corporate governance policies) is, however, also relevant to small-cap enterprises. Given the illiquidity and risk of such stocks, a close, consultative relationship between investor and investee firm can be strategically important to long-term growth. For this reason, of all listed entities, small-caps may be among the most responsive to governance concerns raised by pension funds.^{Endnote 95}