Opus News & Insights

Review of U.S. Small Caps - April 2017
Tuesday, May 9, 2017

Key Takeaways
  • U.S. small caps continued to press forward in April as every month thus far in 2017 has yielded a positive return. Small caps returned 1.1% during the period, in line with U.S. large caps for the second straight month. Large caps, boosted by outsized relative performance in January and February, have doubled up small caps' return for the year, outperforming by 3.6%. With large caps beating small caps by a wide margin this year, small caps only trade at a 7% premium to large caps, almost in parity with the average premium of 4%. For reference, at the end of January, small caps traded at a 15% valuation premium to large caps. The Russell 2000 Index (R2K) once again crossed the one-standard deviation line, trading at a forward P/E of 19.1x. The Russell 2000 Value Index (R2KV) and the Russell 2000 Growth Index (R2KG) trade at 17.8x and 21.1x, respectively.
  • Growth has outperformed Value by more than 1.0% in each of the first four months of the year, while last year, Growth only outperformed Value in a total of three different months. This year, Growth leads by a staggering 7.0% against Value, driven by the performance of the fastest EPS growers and the YTD strength from biotechs. Biotechs did not have a material impact on performance this month, but have returned 17.2% for the year. From a sector perspective, Value's overweight in Energy and underweight in Health Care are to blame for the relative underperformance. Finally, when Value wins by such a large margin against Growth in the previous year, it tends to keep the momentum going forward into the new year, which has not been the case so far in 2017.
  • The month of April saw a resurgence from bond proxies, with REITs and Utilities outperforming on the back of falling rates and the fear of weakening Q1 GDP number. Energy continued to fall during the month, returning -9.4% in the R2KV. Energy remains the worst performing sector for the year, down 19.2%, due to the Saudis losing control of OPEC and oversupply in the United States due to higher-cost producing shale companies increasing production. Health Care continued to perform well in the month, even without the support of biotechs, with increased speculation of M&A activity with larger companies looking for inorganic growth in a muted environment. Health Care continues to be the outsized winner for the year.
  • For the first time since October 2016, high quality was the clear winner for the month of April. Up until the end of the first quarter, non-earners, outperformed companies who made money. This trend significantly reversed this past month, as non-earners fell almost 3%, and now trail year-to-date versus earners. Higher-quality companies benefited from lower leverage, yield, and higher ROE. Lower market cap, which tends to be grouped as a low quality factor, was the only metric that performed well for low quality. Lower market cap was a benefactor from the continued ETF inflows that occurred during the month.
  • Year-to-date, 32.9% of small cap core managers are outperforming their relative benchmarks. Value and Growth managers have fared better with 59.9% and 60.1% outperforming, respectively.
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