Should small-cap investors worry?
Small-cap stocks investors who are worried about a recession and dismiss the idea of investing in small caps may be making a big mistake, according to Eaton Vance Investment Managers.
Instead, global small caps deserve a better place in their long-term portfolios as they offer strong risk-adjusted performance versus large caps, diversification and opportunities for active managers.
Eaton Vance director of global small cap equity, Aidan Farrell, said it made sense that investors intuitively were more nervous about small caps as they tended to have higher volatility than their large-cap peers.
However, he said a study by JP Morgan, which looked at the historical performance of small-cap stocks before, during and after recession-linked market downturns, found small caps in the last three US recessions outperformed large caps more often in some regions, including Europe and Japan.
Also, during the 12 months prior to the peak, the Russell 2000 Index averaged returns of 37.9 per cent, compared with 19.8 per cent for the S&P 500 Index, and during the 12 months after a trough, the Russell 2000 averaged a return of 75.8 per cent versus 45.4 per cent for the S&P 500.
“So, there are numerous reasons to consider an appropriate allocation to the small-cap universe - diversification benefits, inefficient markets and the sheer breadth of investment opportunities when compared to the large-cap universe,” Farrell said.
“History suggests investors should think twice about trying to time an investment in small caps due to concerns about the economic cycle and the near-term outlook.”
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