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Opus News & Insights

Review of U.S. Small Caps - June 2018
Wednesday, July 4, 2018

Key Points
  • The market saw increased volatility in June, as there was speculation of a trade war brewing between the United States and China. Nonetheless, the market continued upward with U.S. small caps returning 0.7%, ahead of its larger brethren, U.S. large caps, which returned 0.6%. This is the fourth consecutive month in which small outperformed large, something that has not happened since the beginning of 2016. Furthermore, small caps took command during the second quarter, thanks to over $9.5B in ETF inflows, as investors perceived this space to be unaffected by trade wars.
  • Growth beating Value continues to be a recurring theme, as the latter has only outperformed the former one time since September 2017. June was no exception, as Growth returned 0.8%, besting Value by 0.2%. The Russell 2000 Growth Index (R2KG) saw strong performance from Technology, which the index is overweight. Moreover, the Russell 2000 Value Index (R2KV) underperformed due to relative oversized weights in Materials & Processing and Energy, both of which underperformed.
  • Due to higher EPS estimates, the R2K's forward P/E declined to 19.1x, slightly down from last month, but still up from the 17.9x figure reported in March.Relative to large caps, small caps trade at a 11% premium, well above the 5%historical average. The R2KV trades at a forward P/E of 15.8x and the R2KG trades at 22.2x.
  • Fund flows were the theme for the quarter, as there were increased inflows into ETFs, boosting the smallest of the small. This quarter, small cap ETFs saw $9.5B inflows, which is the second highest quarter ever, following post election flows in Q4 2016. Companies with the lowest leverage and fastest growth continue to outperform, which has also been a theme this year.
  • Energy took a breather in June after returning 22.5% between April and May, as oil prices weakened, even after prices surged post-OPEC meeting on June 22. Bond proxies, i.e., Utilities and REITs, outperformed, as rates held constant thoughout the month.Last month, Consumer Staples was the only sector to post a negative return for the year, but this month, Materials & Processing joined the club, as increased trade tensions weighed in on commodity prices, driving negative performance in the sector.
  • With earnings season now complete, sales and earnings growth has been quite strong. Small caps, on average, have grown sales by 8.8% and earnings by 27.5% relative to the first quarter last year. Both of these figures have outperformed large caps, which reported growth of 8.7% and 20.0%, respectively.
  • For the month, only 35% of small cap Core managers outperformed their relative benchmarks, while Growth managers fared better, with 68% outperforming. Value managers struggled, as defensive sectors outperformed, which Value managers tend to be underweight, leading to only 41% of managers beating their respective benchmark.
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