Small-capitalization stocks are thriving in the current market environment, posting returns that have outperformed the broader index for the past six consecutive quarters, reveals new research from Toronto-based Russell Investments Canada Ltd.
In the third quarter of 2010, the S&P\/TSX small-cap index posted a return of 14.2%, beating the S&P\/TSX composite index\u2019s 10.3% return.
This situation has helped small-cap money managers outperform their large-cap counterparts, according to Russell\u2019s latest Active Manager Report, which draws on data from 135 Canadian actively managed funds. The report found that the median small-cap money manager in Canada had posted a return of 12.7% in Q3, well ahead of the median large-cap money manager\u2019s 9.9% return.
\u201cThe tide has turned in favour of small-caps,\u201d says Kathleen Wylie, senior research analyst for Russell Canada and author of the report. \u201cThat followed about four years in which small-cap managers lagged large-caps.\u201d
Wylie adds that this trend is not surprising, as small-caps often outperform during an economic recovery. \u201cI think this is typical at this stage in the economic cycle,\u201d she says. \u201c[Small-caps] tend to lead.\u201d
Materials stocks were largely responsible for the strength in small-caps in the most recent quarter. That sector, which accounted for almost 37% of the S&P\/TSX composite index\u2019s quarterly return, comprises almost a third of the S&P\/TSX small-cap index vs just 23% of the broader index.
The materials sector was bolstered by huge returns from Potash Corp. of Saskatchewan Ltd., whose share price increased by 61% during the quarter, and Vancouver-based Ivanhoe Mines Ltd., which jumped by 75%.@page_break@But many small-cap managers were substantially underweighted in materials, holding an average of 21% of their portfolio in this sector. As a result, only 29% of small-cap managers beat the small-cap index during Q3.
Financial advisors should take note of this impressive performance by small-cap stocks, Wylie says: \u201cI think investors should consider small-caps. There\u2019s more alpha potential in small-caps than in large-caps.\u201d
Although four years of weak performance may have prompted some clients to scale back their small-cap holdings, Wylie says, such a lengthy stretch of lagging performance is highly unusual.
Russell Canada\u2019s research found that small-cap stocks tend to outperform over longer periods. Over the past 10 years, small-cap stocks have beat the composite index by an average of 48 basis points per quarter. During the same period, the median small-cap money manager outperformed the median large-cap manager by about 115 bps per quarter, on average.
Wylie expects this strong performance to continue: \u201cThere\u2019s definitely more to come.\u201d
Russell Canada\u2019s report also found that the growth style of investing had come back into favour in Q3 after five consecutive quarters during which value-style money managers excelled. During Q3, 47% of growth managers outperformed the S&P\/TSX composite index, vs 31% of value managers.
That is partly because, according to Wylie, the factors that growth managers tend to emphasize in their stock-selection process, such as earnings growth, earnings estimate revisions and earnings surprises, were rewarded in Q3.
As these investment styles constantly come in and out of favour, Wylie encourages advisors to diversify their clients\u2019 portfolios with a mutli-style approach.
\u201cIn the long run,\u201d Wylie says, \u201cthere really isn\u2019t that much difference in performance between growth and value. If you own both styles, you\u2019re going to weather some of these swings a bit better.\u201d\t IE<\/b><\/p>\n","protected":false},"excerpt":{"rendered":"
New research reveals that the materials sector had propelled small-cap stocks in outperforming their larger counterparts<\/p>\n","protected":false},"author":4,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[3013,3021],"tags":[2403,2550,3155],"yst_prominent_words":[],"acf":[],"_links":{"self":[{"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/posts\/317509"}],"collection":[{"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/users\/4"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/comments?post=317509"}],"version-history":[{"count":1,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/posts\/317509\/revisions"}],"predecessor-version":[{"id":374169,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/posts\/317509\/revisions\/374169"}],"wp:attachment":[{"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/media?parent=317509"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/categories?post=317509"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/tags?post=317509"},{"taxonomy":"yst_prominent_words","embeddable":true,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/yst_prominent_words?post=317509"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}