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Opus News & Insights

Review of U.S. Small Caps - August 2018
Tuesday, September 4, 2018

Key Points
  • Onward and upward for the market, keeping with recent themes of favoring small caps, Growth, and Health Care. The impact of "Trade Wars" has slightly subsided, as the U.S. and Mexico agreed to a deal, potentially strong arming both China and Canada in the process. With this, all major indices continued to reach new all-time highs during August.
  • The Russell 2000 Index (R2K) had its best August performance since 2014, returning 4.3%. Last month, U.S. large caps outperformed U.S. small caps for only the second time in 2018, as large had better-than-expected earnings.August switched this narrative, with small outperforming large due to its best reporting season since Q4 2010. For 2018, small continues to lead large by 4.3%.
  • Growth continues to dominate, keeping momentum with 2018 and 2017, as it beat Value by 3.8% during August. Thus far in 2018, Value has only materially outperformed Growth in one month, April. This dominance is very apparent,especially if you look over a longer interval, with Growth outperforming value by 26.3% since the beginning of 2017.
  • Ironically, after Value and Growth matched performance in July, the same sectors drove performance in August, but this time, Growth won by a wide margin. The difference was Health Care's dominance, especially in biotechs,which returned 6.5% during the month. Biotechs, a significant overweight in Growth relative to Value, has returned 21.2% for the year leading the industry to its highest-ever weighting in the Russell 2000 Growth Index (R2KG) at 12.6%. With interest rates appearing to be lower for longer, REITs performed well, returning 3.1%, leading the Financial sector, as banks only returned 2.2%.
  • For the year, Health Care is the clear winner, outperforming the second-best returning sector, Technology, by 20.1%. This is eerily similar to 2017, when, again, Health Care was the best performing sector, outperforming the second-best returning sector by 12.4%. This continued dominance for Health Care has been one of the main drivers for Growth's relative outperformance vs. value.
  • During August, themes continued in terms of factor performance. The non-earners, highly-valued, non-yielders, lower leverage,and the fastest EPS growers outperformed. All of these factors continue to lead for the year.
  • Earnings season came to a close this month with small outperforming large for the first time since Q2 2016. Small earnings grew 26.8%, the best figure since Q4 2010, while revenue growth reported its best quarter since Q3 2011 at 9.8%. Large caps posted earnings growth of 24.9% and revenue growth of 9.9%.
  • For the month, 25% of small cap Core managers outperformed their relative benchmarks, while Growth managers continue to fare better with 65% outperforming. Value managers were in between, as 42% of managers beat their respective benchmark.
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