Gaining a decent stock allocation in a tightly-held initial public offering (IPO) has helped some funds improve returns over the years, but there were hardly any suitable small-cap industrial floats in 2011, and the 2012 outlook is even worse.

Investors can expect few easy wins in this year's IPO market.

IPO volumes were up last year, but most were for tiny exploration stocks that small-cap funds typically avoid.

Ninety-two small-cap companies (market capitalisation less than $100 million) listed in 2011, up 10 per cent on 2010, the HLB Mann Judd "Small Cap IPO Watch" report shows.

The average share price loss against the issue price was 12 per cent, slightly better than the broader market.

Total capital raised by small-cap companies in 2011 was down 17 per cent on 2010 and the average raising was $6.84 million, the lowest in five years, according to the report released this week.

The average value of all floats in 201l at listing was just $25 million, Investor Weekly research shows.

Simply put, most floats in 2011 were too small, illiquid and speculative for small-cap funds that usually favour floats of larger established, profitable industrial or mining services companies.

Australian equity mid-to-small growth funds are slightly underperforming the same style of large-cap funds, Morningstar research shows.

They lost 14.7 per cent compared to 12.6 per cent for large-cap funds in the year to 31 December 2011.

Small-cap growth funds have had more than double the returns of large-cap growth funds over three years, and outperformed them over five and 10 years.

The big question is whether the recent underperformance of small-cap growth funds will continue.

The absence of IPOs will not help.

This year's IPO market could have a different tone, with fewer small exploration floats and the return of much larger floats for corporate or government assets, provided the share market improves.

Such floats are unlikely to suit small-cap funds seeking to invest in undervalued emerging companies.

An important source of floats in recent years, private equity, has dried up.

The poor performance of floats such as Myer Holdings, Kathmandu Holdings and, more recently, Collins Foods has further dented the attractiveness of private-equity-vended assets in the IPO market, many of which have been for smaller industrial companies that suit the investment style of small-cap funds.

More likely is secondary private equity sales as assets are sold between firms, rather than to the public.

There is some good news for small-cap funds.

The underperformance of resource stocks in 2011 helped small-cap funds that avoid mining stocks.

A higher weighting of mining and energy companies in the Small Ordinaries Index has made it harder for small-cap funds that focused on industrial companies to outperform their index during the mining boom in the past few years.

More mergers and acquisitions activity among small companies this year could also help small-cap funds.

Small-cap performance is ultimately about stock-picking rather than broad market trends or indices.

The strong average outperformance of small-cap funds over long periods is a good sign, and the best funds have shown they can outperform in different market conditions and make money with or without share market floats.

But there is little doubt a risk-averse market and the absence of new opportunities through the IPO market is a tougher backdrop for small-cap fund outperformance.