The research house considered a total of 29 strategies in its review, awarding three funds the highest ratings, eight 'A' ratings, nine 'BB' ratings and two 'B' ratings. Five strategies were screened and two refused to be rated.
The review demonstrated a strong sector as all strategies reviewed had outperformed the S&P/ASX Small Ordinaries index over a 1 to 5 year timeframe, van Eyk senior investment analyst Varun Venkatraman said.
The three AA-rated managers also outperformed the S&P/ASX200 over the same timeframe.
"It's a highly competitive peer group, much more so than the large cap sector," Mr Venkatraman said.
"It reinforces our belief that over the long-term, there is good potential for these managers to generate excess returns for investors."
The ability of managers to identify quality companies was key to their rating, but it was particularly important in the small caps sector given it was relatively under-researched by the market, compared to the large cap sector, van Eyk said.
Managers that were able to definitively identify strong balance sheets, superior management and defendable earnings streams were more likely to outperform.
"This also means that a manager has to have a very broad knowledge of the sector. The composition of the small calls index changes relatively quickly and managers have to keep on top of who is in the investable universe," Venkatraman said.
van Eyk has a bias toward small cap managers that were "benchmark unaware", given the potential for deriving excess returns from the sector, that is, the managers were not subject to strict stock and sector limits, and were free to exploit investment opportunities to their fullest.
