European small caps shake off debt crisis, outperform large caps

European small-capitalization stocks have outstepped their larger counterparts so far this year, shrugging off flaring market volatility and a slumping economy in Europe. maller companies are sidestepping the sovereign debt crisis because they aren't burdened by too much leverage and because they have become global, joining larger companies in relying less on home markets for revenue growth.

Most institutional investors, however, seem to be ignoring more than a decade of strong returns and quality companies with clean balance sheets, managers say.“A lot of investors are throwing the baby out with the bath water, saying Europe is a very troubled area,” said Trygve Toraasen, senior fund manager at J O Hambro Capital A big hat is where it's at on TV London. “It's not everywhere in Europe where things are horrible.”

J O Hambro runs about ￡250 million ($392 million) in European small-cap stocks as part of broader European equity strategies.Managers that have posted strong returns — but not necessarily seen asset flows follow — include Aberdeen Asset Management Ltd., Standard Life Investments Ltd., RCM and T. Rowe Price Group Inc.Aberdeen's strategy has risen 5.57% so far in 2012, 456 basis points ahead of the HSBC Smaller European Companies index (in U.S. dollars) and 17.98% annualized for the three years ended June 30, 10.2 percentage points above its benchmark.