Small-cap stocks have more room to run

The category has had a strong year, but that doesn't scare some financial advisers

Oct 10, 2016 @ 12:56 pm

By Jeff Benjamin

+ Zoom

Despite the run-up by small-cap stocks this year, the longer-term view still favors smaller company stocks over larger companies, according to some market watchers.

Small-cap growth funds tracked by Morningstar gained an average of 6.6% since the start of the year, while large-cap funds averaged 2.85%.

But over the past three years, large cap funds averaged 9.1%, while small cap funds averaged just 5%.

“Many investors and their advisers seem to have only considered large caps, especially in the U.S., which is perhaps related to fear of economic uncertainty,” said Kashif Ahmed, president of American Private Wealth.

“Many folks don't realize there are plenty of small caps with dividends, and they deliver sound dividend growth,” he added.

Paul Schatz, president of Heritage Capital Management, is also firmly in the small-cap bull camp.

“I have been continuously long small caps since May, and remain bullish today,” he said. “Although they haven't exceeded their June 2015 peak, the group has been leading this rally and I expect it to see all-time highs this year.”

Rose Swanger, president of Advise Finance, has enjoyed the recent small-cap run, but is now playing the category more cautiously.

“Small caps are at 52-week highs, so in the quarterly reviews I've been doing with clients we've been cutting back that exposure,” she said. “If I'm putting money to work right now I would not put it into small caps because of the higher valuations.”

It is, in many respects, a matter of preference that is often determined by risk tolerance levels, according to Todd Rosenbluth, director of mutual fund and ETF research at CFRA.

“Investors typically have stronger growth expectation when it comes to small caps, but that comes with more risk because they are less-proven companies,” he said.

The inch-worm pace of the U.S. economic recovery, a near-constant threat of higher interest rates, and an unprecedented presidential election season all combine to represent risk to investors, according to Mr. Rosenbluth.

With the in mind, it would not be surprising to see investors favoring the more defensive large-cap categories over small caps, he added.

An August survey of more than 200 financial professionals, conducted by Alger, found that 76% described themselves as bullish on U.S. small-cap stocks.

But that same survey also showed just 30% of respondents expect small caps to outperform large- and mid-cap stocks over the next 12 to 24 months.

According to Morningstar, actively managed small-cap equity funds have seen $13.8 billion in net outflows this year through August, which equals a 3.5% category asset drop.

Large-cap active funds, over the same period lost $115.9 billion, or about 4%.

Large cap and small cap actively managed mutual funds outflows
Source: Morningstar, Inc.

But over the past three years, active small-cap fund assets lost $62.2 billion, or about 14%, while large-cap funds lost $256.6 billion, or 8.7%.

In essence, small-cap funds have taken the biggest hit, which goes against the grain of the attitude of most financial professionals, according to Brad Neuman, vice president and chief investment strategist at Alger.

“The experts are bullish on small caps, but investors have not been following that with their money,” he said.

0
Comments

What do you think?

View comments

Recommended for you

Featured video

INTV

Wirehouse training programs are in vogue

At one time, major brokerage houses ran large, expensive training programs for thousands of young brokers, and now it looks as if they are about to return to that model.

Video Spotlight

Will It Last As Long As Your Clients Do?

Sponsored by Prudential

Video Spotlight

The Catalyst

Sponsored by Pershing

Latest news & opinion

Brian Block's $4 million bonus was tied to a key metric at ARCP

Prosecution rests case in fraud trial against CFO of American Realty Capital Properties.

Edward Jones is winning the Google search war

Brokerage firm's digital marketing investment helps land it at the top of local and overall search engine results, report finds.

Voya's win in 401(k) fee suit involving Financial Engines bodes well for other record keepers

Fidelity, Aon Hewitt and Xerox HR Solutions are currently defending against similar fiduciary-breach claims.

Collective investment trusts getting more attention from 401(k) advisers

The funds are catching on due largely to lower costs and more product availability, but come with some inherent drawbacks.

Vanguard rides robo-advice wave to $65B in assets

Personal Advisor Services, four times the size of its closest competitor, combines digital and human touch.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print