30 Years of US Small Cap Investing
In the US, 1987, was not necessarily a remarkable year by historical standards. The Ford Escort was the most popular car, The Last Emperor won Best Picture at the Oscars and Paul Simon’s Graceland won the Grammy for Best Album of the Year1.
In Orinda, California, 1987 marked Rosenberg Equities’ first year managing US small cap equity strategies. Now, after 30 years of investing in US small caps, we take a look back on the evolution of this important market segment.
Small Caps are dynamic
The precise definition of small cap can differ among investors. For the widely used Russell 2000 Index, small-cap stocks are based on a count of companies; specifically, the 1,001st – 3,000th largest companies by market capitalisation measured and reconstituted each June. Over the last 30 years, this group of 2,000 companies accounted for about 8% of total US market capitalisation, ranging between 7% to 11%. Of course, there is no magic to cutting the market off at the 3,000th stock. But including the stocks in our own investment universe below that threshold adds roughly another 1% of market cap to the size of the smallcap segment on average over the past 30 years. Given these averages and range, a good rule of thumb is that smaller companies make up about 10% of the US equity market.
Smaller companies are a dynamic group with the constituents moving in and out of the universe at an impressive rate. Back in June 1987, there were just over 2,700 stocks in our investment universe below.
This communication is for professional or institutional investors only and must not be relied upon by retail clients or investors. Circulation must be restricted accordingly. Any reproduction of this information, in whole or in part, is prohibited.
This material is published for informational and educational purposes only and is neither an offer to enter into, or a term or condition of, any business, trade, contract or agreement with the recipient or any other party nor is it a solicitation for any services, securities, or funds described herein, nor is it intended to provide investment, tax, or legal advice. This material is strictly confidential. If this material refers to funds, any investments made in such funds are subject to the relevant offering documents. This material is not intended for distribution to persons or jurisdictions where it is prohibited. No representation is made that any of the services, securities, or funds referred to herein are suitable for any particular investor. No guarantee, warranty, or representation is given as to the accuracy or completeness of this material. Investors should be aware that investments may decrease in value and that past or backtested performance is no guide to future performance. Any forward-looking or simulated data or information contained herein are subject to inherent limitations and are based upon assumptions that may not materialize or may vary significantly from actual results. Prospective investors should evaluate such assumptions to determine whether they are appropriate for their purposes and consult financial or other professional advisor if they are unsure about any meaning of the information contained herein. Investment models, research, and risk controls referred to herein do not guarantee against loss of principal, nor do they guarantee that any investment objectives described herein will be achieved. The data, projections, forecasts, anticipations, hypotheses and/or opinions herein are subjective, and are not necessarily used or followed by the firm or its affiliates who may act based on their own opinions and as independent departments within the organization. Investors should understand that the information presented herein is always subject to change and all rights are reserved thereof. Performance shown, unless otherwise stated, is gross of management fees. An investor’s actual return will be reduced by management fees and other expenses the investor may incur.
The firm seeks to achieve its clients’ investment objectives primarily through reliance on the modelling of proprietary and 3rd party financial and non-financial data, information, and considerations, the sources and weights of which may be subject to change. Although its investment approach is driven by bottom-up stock selection akin to that of a traditional fundamental investor, the firm seeks to achieve its clients’ investment objectives primarily in reliance on analytical models. The goal of the firm’s systematic approach is not to replicate a perfect “model” portfolio; instead, like other long-term, fundamentally oriented investors, it seeks to create portfolios possessing ex ante those fundamental and statistically important characteristics reflecting our investment beliefs. The firm’s ability to implement its investment objectives depends on various considerations such as the models’ economic, analytical and mathematical underpinnings, the accurate encapsulation of those principles in a complex computational (including software code) environment, the quality of the models’ data inputs, changes in market conditions, and the successful expression of the models' views into the investment portfolio construction process. Many of these have subjective elements that present the possibility of human error. While the investment process principally relies on models, the firm’s process also incorporates the investment judgment of its portfolio managers who may exercise discretion in attempting to capture the intent of the models, particularly in changing market conditions. The firm’s success in implementing its investment objectives may depend on the ability of portfolio managers and others to interpret and implement the signals generated by the models. The firm has established certain systematic rules and processes for monitoring client portfolios to ensure that they are managed in accordance with their investment objectives, but there is no guarantee that these rules or processes will effectively manage the risks associated with its investment process under all market conditions. While the firm employs controls designed to assure that our models are sound in their development and appropriately adapted, calibrated and configured, analytical error, software development errors, and implementation errors are an inherent risk of complex analytical models and quantitative investment management processes. These errors may be extremely hard to detect, and some may go undetected for long periods of time or indefinitely. The firm’s controls, including our escalation policies, are designed to ensure that certain types of errors are subject to review once discovered. However, the effect of errors on our investment process and, where relevant, performance (which can be either positive or negative) may not be fully apparent even when discovered. When the firm discovers an investment process error in one of its models, it may in good faith and in accordance with its obligations, decide not to correct the error, to delay correction of an error, or develop other methodology to address the error, if not inconsistent with the client’s interests. Also, the firm generally will not disclose to affected clients investment process errors that are not the result of a contractual or regulatory breach, or that are non-compensable, unless it otherwise determines that information regarding the error is material to its clients.
© 2018 AXA Investment Managers. All rights reserved.
Please note that references to “Rosenberg Equities” herein refer solely to an expertise of AXA Investment Managers and not a specific legal entity. These materials are issued by the relevant AXA Investment Managers legal entity located in the recipient’s respective jurisdiction or region. Depending on the relevant issuing entity, the following additional disclosures may apply:
For Australian investors: AXA Investment Managers Asia (Singapore) Ltd (ARBN 115203622) is exempt from the requirement to hold an Australian Financial Services License and is regulated by the Monetary Authority of Singapore under Singaporean laws, which differ from Australian laws. AXA IM offers financial services in Australia only to residents who are “wholesale clients" within the meaning of Corporations Act 2001 (Cth). For European investors: AXA Investment Managers UK Ltd is authorised and regulated by the Financial Conduct Authority in the United Kingdom. Registered in England and Wales No. 01431068. Registered Office: 7 Newgate Street, London EC1A 7NX. This material is intended for the use of persons meeting the MiFID client classification of Professional Clients or Eligible Counterparties and is not approved for communication to retail customers in any territory. The financial instruments used carry inherent risks which are unavoidable such as Market Risk, Credit Risk, Liquidity Risk and other risks. These risks are described in detail in our Risk Warnings document which is available upon request. For Hong Kong investors: In Hong Kong, this document is issued by AXA Investment Managers Asia Limited (SFC License No. AAP809), which is authorized and regulated by Securities and Futures Commission. This document is to be used only by persons defined as “professional investor” under Part 1 of Schedule 1 to the Securities and Futures Ordinance (SFO) and other regulations, rules, guidelines or circulars which reference “professional investor” as defined under Part 1 of Schedule 1 to the SFO. This document must not be relied upon by retail investors. Circulation must be restricted accordingly. The authorisation of any fund by the Securities and Futures Commission in Hong Kong (“SFC”) does not imply official approval or recommendation. SFC authorization of a fund is not a recommendation or endorsement of a fund nor does it guarantee the commercial merits of a fund or its performance. It does not mean the fund is suitable for all investors nor is it an endorsement of its suitability for any particular investor or class of investors. Where any of the Funds is not authorized by the SFC, the information contained herein in connection with such unauthorized Fund is solely for the use of professional investors in Hong Kong. Materials exempted from authorization by the SFC have not been reviewed by the SFC. For Japanese investors: AXA Investment Managers Japan Ltd., whose registered office and principal place of business is at NBF Platinum Tower 14F 1-17-3 Shirokane, Minato-ku, Tokyo 108-0072, Japan, which is registered with the Financial Services Agency of Japan under the number KANTOZAIMUKYOKUCHO (KINSHO) 16, and is a member of Japan Securities Dealers Association, Type II Financial Instrument Firms Association, Investment Trust Association of Japan and Japan Investment Advisors Association to carry out the regulated activity of Financial Instrument Business under the Financial Instrument Exchange Law of Japan. In Japan, none of the funds mentioned in this document are registered under the Financial Instrument Exchange Law of Japan or Act on Investment Trusts and Investment Corporations. This document is purely for the information purpose for use by Qualified Institutional Investors defined by the Financial Instrument Exchange Law of Japan. or Korean investors: In Korea, AXA Investment Managers Asia (Singapore) Ltd is a registered Cross Border Investment Advisor/Discretionary Investment Management Company under the Financial Investment Services and Capital Markets Act (the “Act”). The activities referenced under the Act are 5-2-2 Investment Advisory Business and 6-2-2 Discretionary Investment Management Business, respectively. Its financial services are available in Korea only to Professional Investors within the meaning of Article 10 of Enforcement Decree of the Financial Investment Services and Capital Markets Act. The relevant offering documents contain important information on selling restrictions and risk factors. You should read them carefully before entering into any transaction. It is your responsibility to be aware of and to observe all applicable laws and regulations of any relevant jurisdiction. To the extent that any fund is mentioned in this document, neither the fund nor AXA IM Asia is making any representation with respect to the eligibility of any recipients of this document to acquire the units/shares in the fund under the laws of Korea, including but without limitation the Foreign Exchange Transaction Act and Regulations thereunder. The units/shares have not been registered under the Financial Investment Services and Capital Markets Act of Korea, and none of the units/shares may be offered, sold or delivered, or offered or sold to any person for re-offering or resale, directly or indirectly, in Korea or to any resident of Korea except pursuant to applicable laws and regulations of Korea.
For Singapore investors: In Singapore, this document is issued by AXA Investment Managers Asia (Singapore) Ltd. (Registration No. 199001714W). This document is for use only by Institutional Investors as defined in Section 4A of the Securities and Futures Act (Cap. 289) and must not be relied upon by retail clients or investors. Circulation must be restricted accordingly. For Swiss Investors: For Switzerland this information is intended exclusively for Qualified Investors according to Swiss law. Circulation must be restricted accordingly. The Swiss representative for the Irish-domiciled open-ended Unit Trust AXA Rosenberg Equity Alpha Trust, is First Independent Fund Services Ltd, Klausstrasse 33, CH-8008 Zurich. The Swiss paying agent is Credit Suisse, Paradeplatz 8, CH-8001 Zurich. The current prospectus, the Key Investor Information Document (the ‘KIID’) as well as the annual and semi-annual reports can be obtained free of charge from the Swiss representative. In respect of the units distributed in and from Switzerland, the place of jurisdiction is Zurich, Switzerland. For US investors: Further information on AXA Rosenberg Investment Management LLC’s fees may be found in its Form ADV Part 2 or provided upon request. The collection of management fees produces a compounding effect on the total rate of return net of management fees. As an example, the effect of management fees on the total value of an investor’s portfolio assuming a) quarterly fee assessment, b) $1,000,000 investment, c) portfolio return of 8% a year, and d) 1.00% annual investment management fee would be $10,416 in the first year, and cumulatively $59,816 over five years and $143,430 over ten years.