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Opus News & Insights

Review of U.S. Small Caps - September 2018
Monday, October 8, 2018

Key Points
  • Fears of a "trade war" seem to have subsided, to a degree, following deals signed with two of the U.S.'s three biggest trading partners -Mexico in late August, and Canada, just at the end of the quarter. This may be one of the reasons that U.S. large caps closed the performance gap with U.S. small caps during the month and quarter. The former, large caps, reached new all-time highs during September.
  • After having its best August performance since 2014, the Russell 2000 Index (R2K) took a pause in September, returning -2.4%. Small cap earnings estimates fell from 30% at the end of Q2 to their current projection of 22%. Couple this with subsiding trade tensions, small caps underperformed their larger brethren. The S&P 500 returned 0.6% for the month. Small now only leads large by 1.0% year-to-date.
  • Growth continues to dominate, keeping momentum with 2018 and 2017, as it narrowly beat Value in September. 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 25.9% since the beginning of 2017.
  • The forward P/E for the R2K and the R2KG stayed constant over the past month at 20.3x and 24.3x, respectively. Value got a little cheaper,now trading at 16.0x. The R2KG is trading at its highest level since 2001. Relative to large caps, small caps trade at an 11% premium vs. the historical average of 5%.
  • For the year, Health Care continues to be the clear winner, outperforming the second-best returning sector, Producer Durables, by 16.4%. This is eerily similar to 2017, when, again, Health Care was the best performing sector, outperforming the second-best returning sector, Producer Durables, by 12.4%. This continued dominance for Health Care has been one of the main drivers for Growth's relative outperformance vs.Value.
  • During September, prior themes continued in terms of factor performance. The non-earners, highly-valued and non-yielders outperformed. All of these factors, plus lower leverage, continue to lead for the year.
  • For the month, 52% of small cap Core managers outperformed their relative benchmarks, while Growth managers continue to fare better with 73% outperforming. Value lagged, as only 41% of managers beat their respective benchmark. For the quarter, only 30% of Core and Value managers outperformed, while 68% of Growth managers outperformed; the best showing since 2000.
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