Small CapsMay 2 2017

Insight: US small-cap funds plough onwards

  • Understand how North American equities have performed
  • Grasp the drivers behind this performance
  • Gain an understanding of the headwinds facing US small-caps
  • Understand how North American equities have performed
  • Grasp the drivers behind this performance
  • Gain an understanding of the headwinds facing US small-caps
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Insight: US small-cap funds plough onwards

The second half 2016 brought with it better sentiment in general, and US small-cap funds were again an area of investor interest. From August 2016 to February 2017, total net retail sales for the sector were £185m. 

The Trump effect appears to be a key factor, as £180m poured into North American small-caps between November to February. Despite the sector’s small size, £78m of this total was invested in November alone, making it the sixth most popular equity asset class out of 19.

Taxing time

Have these investors come in too late or are there more excess returns to be garnered? 

Many global fund managers are now moving away from the US. Mark Whitehead, portfolio manager at Securities Trust of Scotland, suggests that the eurozone offers better value. But US small caps have powered higher in the past six months regardless, the Russell 2000 index returning more than 15 per cent in local currency terms. 

However, more recently, president Trump’s well-documented failure to repeal ‘Obamacare’ and push his own healthcare plans through congress has delivered a blow to investor confidence. 

Not only has it left the president somewhat red-faced, especially as opposition came from within his party, but it has also increased scepticism about his ability to deliver on other major reforms – namely tax. In the face of these issues, rumblings from within the US Treasury have suggested the August target for corporate tax reforms is looking increasingly unrealistic.

Smaller companies stood to be major beneficiaries of these reforms, so the potential gridlock has hurt the Russell 2000 in the short term. 

Performance

Data from FE shows just how strong the rally has been. IA North American Smaller Companies is the second best performing sector over the past five years, outperformed only by IA Japanese Smaller Companies, with broader North American funds in third place.

As Table 1 show, the average fund or trust in the sector has beaten the index over 10 years. 

Investors who are prepared to take the additional risk inherent within the small-cap space have been richly rewarded. In what is a reasonably small universe, with only 14 open-ended funds and three investment trusts in total, the consistency of returns has been perhaps the most impressive aspect. 

When analysing performance over five years, two investment trusts have been the standout performers. JPMorgan’s US Smaller Companies trust tops the tree with average annual growth of 21.4 per cent, and – helped along by the weakness of the pound – a staggering 57 per cent increase since April 2016.

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