The surprising election of Donald Trump and his proposed governmental reforms, which have been well-received by the financial markets, may help unlock the valuation opportunity for investors in US microcaps, according to Thomson Horstmann and Bryant (THB).
The company said that investors were in the early stages of recognising and appreciating the value of small companies, fuelled by stronger economic growth, regulatory reform and lower corporate taxes.
The firm’s chief executive, Christopher N. Cuesta, stressed in his letter to investors that almost 10 years of increased regulatory burden on smaller companies may have retarded the normal cyclical recovery forces witnessed during prior economic recoveries.
Additionally, the smaller cap companies were expected to benefit further from the anticipated secondary effect of a more pro-business US environment, such as heightened levels of mergers and acquisitions (M&As) activity.
According to Cuesta, the only risks associated with the new administration and its proposed reforms was the speed of enactment.
“We would view any market pullbacks related to this process as buying opportunities as we believe a large percentage of president-elect Trump’s agenda items will eventually be enacted and the secondary effects that are triggered will continue to provide a positive environment for smaller cap equities,” he said.
Cuesta added that microcaps also represented some “creative opportunities” for investors, such as mutual savings bank conversions, that no longer existed across a broader market cap landscape.
This year, THB added a Massachusetts-based converted thrift called Randolph Bancorp (RNDB), which together with another addition of Johnson Outdoors, helped the THB micro cap portfolio return +32.8 per cent in 2016 against 20.4 per cent of Russell Microcap benchmark return, the company said.
In Q4 the THB micro cap composite returned 17.1 per cent in USD (net of fees), outperforming the index by 7.1 per cent while the THB portfolio returned 32.5 per cent for the year, beating the index by 12.1 per cent.
At the same time, the Russel microcap index returned 10 per cent in US dollars in Q4 and outperformed the S&P 500 index by 8.4 per cent for the full year 2016.
According to THB, healthcare was the biggest contributor to its portfolio’s performance, followed by energy and financials while consumer staples was the biggest detractor from performance, followed by utilities and real estate.
A the same time, the market saw financials as the best performer in the quarter (24.8 per cent), which was helped by the Federal Reserve raising interest rates and the possibility of more rate hikes in the coming year as well as the expectation of a less onerous regulatory environment expected under a Trump administration.
The sector was followed by energy (18.7 per cent), utilities (16.7 per cent) and industrials (13.8 per cent) while healthcare was the ‘lone negative sector’ due to uncertainty related to healthcare reform.
