Performance of Micro-Cap Mutual Funds

To examine whether managers of micro-cap mutual funds add value, we compare the performance of micro-cap mutual funds against a micro-cap index. Micro-cap funds are mutual funds that invest in small firms with market value less than $300 million. Micro-cap mutual funds typically are actively managed; however, the index, by definition, is passive. We examine 1,125 micro-cap funds with at least twenty-four months of consecutive returns between June 2000 and December 2008 and find that only a third of the funds have risk-adjusted returns that exceed the benchmark return. We cannot, therefore, unequivocally recommend investing in micro-cap mutual funds rather than the micro-cap index