Back

Strategy snippet - Four reasons to consider investing in small-cap value

Strategy snippet - Four reasons to consider investing in small-cap value

Rosenberg equities

Fuelled by exceptionally loose monetary policy, value stocks have struggled relative to growth since the end of the global financial crisis in 2009. Nowhere has this been truer than in small-cap companies. We believe that the market is now poised to shift back in favour of increasingly undervalued small-cap value stocks and away from increasingly speculative growth ones. We base our view on four reasons, which we cover in more detail in the following pages:

1) History suggests speculative growth stocks ultimately let you down

2) Small-cap value is very oversold

3) Small-cap value is now cheap

4) Small-cap value should benefit from rising interest rates

Small cap: value versus growth performance

The benefits of value investing have been espoused since the 1930s; over the long run, favouring ‘cheap’ stocks relative to assets and earnings over stocks with higher growth potential has been rewarded, especially among small-cap stocks. Exhibit 1 shows that, amongst global small caps, value stocks have outperformed growth by over 200% cumulatively since 1994.

This communication is for professional/institutional investors only and must not be relied upon by retail investors. Any reproduction/redistribution of this information is prohibited.

This material is published for informational purposes only and is neither an offer to enter into, or a term or condition of any business or agreement with the recipient or any other party, nor is it a solicitation for any services, securities, or funds herein, nor is it intended to provide investment, tax, or legal advice. If this material refers to funds, investments made therein are subject to the relevant fund documents. This material is not intended for distribution to persons or in jurisdictions where prohibited. No representation is made that any of the services, securities, or funds herein are suitable for any particular investor, and therefore, any prospective investor should consult their financial or other advisors about the appropriateness thereof. No representation or warranty is given as to the accuracy or completeness of this material. Investments may decrease in value and that past or backtested performance is no guide to future performance. Forward-looking or simulated data or information herein are subject to inherent limitations and are based upon assumptions that may not materialize, and may vary significantly from actual results. Investment models, research, and risk controls described herein do not guarantee against loss of principal, nor that any investment objectives shown 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 or entities within the organization. This information 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 many of its investment approaches are 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.

If MSCI information appears herein, it may only be used for your internal use, it may not be reproduced or re-disseminated in any form, and it may not be used as a basis for, or a component of, any financial instruments or products or indices. None of the MSCI information is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. Historical data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. The MSCI information is provided on an “as is” basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively, the “MSCI Parties”) expressly disclaims all warranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages. (www.mscibarra.com).

©2018 AXA Investment Managers. All rights reserved.