Large v small: Which will do best in a drawdown?
It is a “very hard call” to determine whether large or small cap funds will do better in the next market drawdown with the answer depending on the impact of inflation expectations.
There had been much speculation in recent weeks as to whether the market was likely to see a pullback on the back of rising bond yields which could subsequently lead to a rise in inflation.
Asked whether large or small caps would be most affected by this, Bill Pridham, portfolio manager at Ellerston Capital, said: “Mid and small caps tend to underperform large caps in a drawdown but it depends on what is driving the drawdown.
“If it is driven by a pick-up in inflation expectations then assets with a high P/E ratio will underperform. But that inflation is driven by improved economic activity which mid and small caps are most exposed to. So it is tough, it is a very hard call to make.
“We have already seen this in play since November when rates went from 60 bps to 160 bps and we have seen mid and small caps outperforming.”
Earlier this week, it was found small caps began to lead markets worldwide after a period of dominance for large caps but that Australia was the only region bucking this trend, having seen small caps already start outperforming last year.
The firm’s Ellerston Australian MicroCap fund had returned 91% over one year to 31 March, 2021, while the Global Mid Small Unhedged one had returned 49%.
But, since the November period that Pridham indicated, the Ellerston Global Mid Small Unhedged fund had outperformed its Australian counterpart with returns of 21% compared to returns of 13% by the Australian one.
AUTHOR
Laura Dew
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