Tracking of formal shareholder proposals in the United States by the Investor Responsibility Research Center (IRRC) sheds some light on what may be the incidence of small-cap targeting on corporate governance issues in Canada, if not today, perhaps in future. The IRRC database of 4,000 companies includes many listed on Standard and Poor's small-cap and mid-cap indices and the Russell 2000 Index. The IRRC reports that governance concerns addressed to small-cap firm management tend to be more performance-related than average, including some forwarded by such American pension funds as CalPERS and the State of Wisconsin Investment Board (SWIB).Endnote 96
For further general discussion of this topic, see Pension Activism, Made-in-Canada, America's Shareholder Activism and The Newest Activists.
The following are illustrations of stock-picking strategies whereby pension participation in low- capitalization investing is direct and in-house (in the case of large funds) or indirect and externally-managed in a pooling vehicle (in the case of funds of all sizes).
With well-developed internally-managed pools for small-cap investment, OMERS and the private sector pension plans associated with Bell Canada, illustrate participation that is direct.
Unlike most pension funds, OMERS has been investing in small-cap stocks over the past two decades. Today, this pension fund's strategy is to distribute its overall asset exposure to small-caps, currently at over $800 million - or close to 2.8 percent of total assets - to several managers and pools, most of which are external. In addition, OMERS retains an in-house dedicated pool. Established in the mid-1980s, the latter is based on a commitment of approximately $400 million and stock-picking beginning at a minimum of $50 million on the TSE.
The investment style selected for the OMERS dedicated pool has been described as value-oriented with regular attention also given to growth indicators. Practically speaking, the value approach to small-caps entails a "bottom up" search for stock prices that are low when compared with the worth of underlying business fundamentals, perceptible in assessed earnings prospects, internal capital structures, financial ratios and other value measures. Of course, value is discovered only through investigation and examination by specialty management, in this case, within OMERS. A key source of data relevant to any evaluation of whether certain small-caps suggest poor valuation in public securities exchanges is direct contact between OMERS representatives and firm owners and managers.