Introduction
Therefore it is not surprising the US equity market has been on a steady upward trajectory, although it has been large-cap companies rather than small caps that have benefited most in the past 12 months.
For the 12 months to February 25 2015, the Russell 2000 index, which measures the performance of the small-cap segment of the US equity universe, rose 14.38 per cent, according to data from FE Analytics.
However, in the same period the S&P 500 index went up 25.16 per cent, while the Russell 1000 index, the large-cap segment of the Russell indices, rose by a similar 24.29 per cent.
As Richard Nackenson, manager of the Neuberger Berman US Multi-Cap Opportunities fund, points out, stock correlations among US markets have declined approximately 30 per cent since 2011.
He adds: “For equity investors, lower correlations have resulted in greater performance disparity across market segments. In 2014, for instance, large-cap companies outperformed small-cap companies by the widest margin in 15 years.”
Figures from the Investment Association (IA) show for the 10 years to January 31 2015, the IA North American Smaller Companies sector was the fourth best performing sector rising on average 174.8 per cent, while over a five-year period its average increase of 116.5 per cent tops the list. Its shorter-term performance is less impressive, however, with a 12-month climb of just 12.1 per cent.
However, towards the end of 2014, US small caps as a whole appeared to be benefiting from the lower oil price, which was seen by many as a boost to the US economy.
F&C’s quarterly multi-manager FundWatch survey notes that in the fourth quarter of 2014 the top two performing IA sectors were US-focused, with the IA North American Smaller Companies sector topping the list with a rise of more than 10 per cent as it tends to be dominated by domestic companies. That said, during the same period, many of the smaller oil and gas exploration companies in the US were negatively affected by the oil price decline.
In its paper ‘Concentrated Pain, Widespread Gain: Dynamics of Lower Oil Prices’ the BlackRock Investment Institute notes the downturn in energy-related assets has been dramatic, and has affected many US shale energy players that became “addicted to the easy money” available as oil prices held firm.
It adds: “North American small caps, in particular, rode the wave in the past decade… They sucked in capital to the detriment of companies focusing on exploration outside North America… The falling oil price shattered this cosy arrangement and heralds a cash crunch for some companies.”
With the Federal Reserve widely expected to start increasing interest rates from around the middle of this year, a key question will be how much of an unwelcome impact any unexpected pressure on the US domestic economy could have on the smaller companies sector.
THE PICKS
Threadneedle American Smaller Companies
Managed by Diane Sobin since April 2012, this £568.4m fund aims to invest at least two-thirds of its assets in the shares of US smaller companies. Typically it invests in firms with a market value of between $500m and $10bn. It has delivered consistent performance including a 10-year return of 215.7 per cent compared with the IA North American Smaller Companies sector average of 177.03 per cent. Its largest sector weighting is to industrials at 18.7 per cent, while its top-10 holdings include Westar Energy and Towers Watson.
Hermes US SMID Equity
The 12-month performance of this £254.5m fund, which was launched in September 2012, was 20.49 per cent to February 25 2015, ranking it second in the IA North American Smaller Companies sector, well above the sector average of 13.8 per cent. Managed by Mark Sherlock the fund aims to provide long-term capital appreciation by investing in small- and mid-cap companies in the US, or those that derive a large proportion of their incomes from US activities. Its largest sector weighting is to financial services at 25.25 per cent of the portfolio, while its top-10 holdings include Gildan Activewear, Reinsurance Group of America and Omnicare.
EDITOR’S PICK
North Atlantic Smaller Companies Investment Trust
This £310.8m investment trust is managed by Harwood Capital and aims to provide capital appreciation through investment in smaller companies principally based in countries bordering the North Atlantic Ocean. One of the more overlooked offerings, it appeared in the Investment Adviser 100 Club for the first time in 2014, with its five-year share price return of 137.29 per cent to February 25 2015 almost doubling the AIC IT North American Smaller Companies sector average of 77.9 per cent, according to data from FE Analytics.
