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Opus News & Insights

Review of U.S. Small Caps
Monday, August 15, 2016

Key Takeaways
  • U.S. small cap equities have had a strong run off of the February 11th lows (+28%), particularly relative to U.S. large caps. In July,U.S. small cap equities returned 6.0%, overtaking the S&P 500's returns for the year by 66 bps. Unlike U.S. large caps, U.S. small caps remain below their year ago, all-time highs. The Russell 2000 (R2K) now trades at 19x forward earnings and the P/E is above the one standard deviation line with intraday volatility at a five-year high.
  • Within U.S. small cap, the Russell 2000 Growth Index (R2KG) has overpowered the Russell 2000 Value Index (R2KV) over the past few years,though this trend reversed in the first half of 2016. During the month of July, relative under perfomance in heavier weightings within Value,i.e., Energy and Utilities, drove the under performance against Growth. With the R2KG's nominal weightings in these sectors and outsized weighting in Health Care, Growth was able to outpace the R2KV by more than 1%.
  • Performance in the first half of the year for small caps was led almost exclusively by Utilities and REITs, which posted unsustainable outsized returns. July, bucked the trend, with Utilities being one of only three sectors posting a negative return in the R2K. Financials were driven by banks, not REITs (though REITs continued to perform well). At the end of Q2, Health Care was the only sector to post a negative YTD performance figure, trailing every other sector by more than 14%. However, this month, Health Care was the highest returning sector.• The R2KV continued to favor higher yield and leverage as well as lower valuations. Overall, consistent with 2016 trends, lower quality has performed better than higher quality.
  • Active managers in small caps have continued to see outflows, which totaled $107B since 2009, whereas ETFs continue to see inflows. With the strong July performance, small cap managers within all categories are trailing their benchmarks year-to-date, and only 8% of small cap managers outperformed their benchmark over the last three months.
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