Canadian public securities exchanges are smaller, less liquid and, in some ways, less structurally evolved than those in the United States. Given that these circumstances impact on broad trading trends affecting enterprises of large market capitalization (e.g., comparatively high Canadian costs of equity capital), it should not be surprising that firms characterized by small-cap, low-information, low-price stocks will also encounter implicit challenges.
One of these may be limited pension participation. CLMPC research has found that a key impediment in this regard is insufficient supply of specialty management professionals with the skills and experience, or inadequate marketplace organization of those that exist, to facilitate pension in-house or external allocations.Endnote 105 Anecdotal reports suggests that the absence of available small-cap specialists and vehicles led to unsatisfied pension demand in the mid-1990s (though it is not clear this was a barrier for most of the very largest private and public sector funds). Another problem may be some pension fiduciary misconceptions about the inherent risks and transactional costs associated with holding small-caps or, at least, about how these can be effectively institutionally managed. This is unfortunate considering the long-term focus pension funds can apply to this segment of public equity investing that requires it most.
Along with their cyclical and long-term financial out-performance, small-caps are under-appreciated as a public market avenue for new and developing business and particularly SMEs emerging from private capital markets. To the extent that there are structural obstructions to investment in them, possible collateral benefits to Canadian economic growth and employment may not fully materialize. If this is so, the lost opportunity may be most keenly felt in local and regional economies seeking to diversify.
The advance through exchanges of growing knowledge-based and technology-intensive enterprises - well- represented among small-caps - but not, as yet, in the TSE 300 Index - may be of pre-eminent concern here. When insurmountable difficulties are encountered by those that retain commercial viability, of course, an alternative remains in privately-placed debt and equity (see Pension Funds and Middle Market Investing).
If American shareholder activism trends are any indication, Canadian small-caps enterprises may benefit from a more universal casting of the net by pension funds attending to matters of corporate governance. Indeed, such governance concerns may become increasingly integral to the value-adding strategies of specialists that can assist investee firm development. Research is accumulating in Canada and the United States that testifies to the performance bonus achieved by thoughtful and concerted pension efforts in managing assets in this fashion.Endnote 106
A more precise understanding of the role played by Canadian pension investment in small-cap public equity awaits more and better aggregate data that is made publicly-available. Detailed disclosures of the holdings of pension funds in the United States seems to have informed public policy discussion of this subject there. Perhaps PIAC's recent survey work or other market analysis sources will help rectify this situation in future.