Institutional investors will have key role to play if the run in smaller-cap stocks is to continue

Next 50 indices in their current form are likely to be just as effective in promoting market discipline among smaller-cap companies as the STI has been in the large-cap space

During a meeting over lunch many years ago, a well-known fund manager told me that his emerging market funds had failed to outperform their benchmarks – not because he had backed the wrong stocks, but because his funds had been unable to maintain sufficiently high exposure to the best performers.

He said his funds were not allowed to be more than 10 per cent exposed to a single stock in order to mitigate concentration risk. Yet, their benchmarks were often dominated by a handful of big, well-run companies with shares that were relatively liquid and garnered premium market valuations.

Being unable to match the index weightings of these strong performers, the funds ended up trailing behind. While I was somewhat sceptical, the explanation seemed plausible enough at the time to stop me from pressing him any further about his underperformance.