Opus News & Insights

Review of U.S. Small Caps - June 2017
Monday, July 10, 2017

Key Takeaways
  • U.S. small caps pressed forward; setting record highs during the month of June, returning 3.5%. For the first time all year, small caps outperformed U.S. large caps and Value outperformed Growth, though marginally for the latter.
  • Large caps continue to lead small caps for the year, outperforming by 4.4%. A weakening U.S. dollar, which tends to bode poorly for small caps, coupled with strong earnings growth from large caps, has resulted in small caps significantly trailing for the year. Estimated earnings growth for the second quarter looks to be -2% for small caps, while large caps are expected to see growth of 5%, which is partially attributed to overseas economies performing better.
  • With the reconstitution and a solid gain in June, the Russell 2000 Index (R2K) trades at a forward P/E of 19.7x. The forward P/E for the Russell 2000 Value Index (R2KV) and the Russell 2000 Growth Index (R2KG) now trades at 17.4x and 21.4x, respectively, both well above their historical averages.
  • With the R2KG outperforming the R2KV by more than 1.0% in each of the first five months of the year, June went against the grain with Value slightly outperforming Growth by 6 bps. Growth still leads by 9.4% for the year, but to put this in context, Growth has only erased half the win by Value last year.
  • For the month, Value was able to overcome the surge in biotechs, which Growth has a material overweight. Biotechs were almost up 15% alone during the period. Biotechs are now up 26.4% in 2017, propelling Health Care to be the best performing sector in small caps for the year. Value was able to gain ground against Growth with its overweight in Financials, i.e. banks, which returned 6% during June, though still lagging for the year. Interest rates at the end of June bounced, but not until we hit a new low for the year, benefitting bond proxies, i.e., REITs and Utilities for the quarter. Energy had its best month since January, though still negative and the worst performing sector for the year, down 26.6%. This year has seen the largest sector return dispersion since 2008.
  • After two straight months of high-quality factors outperforming, low-quality factors dominated this month's rally. This reversal saw better performance from stocks with smaller capitalization, lower valuations and slower earnings growth. Much like the first quarter, non-earners, who fell 8.7% during April and May, outperformed in June due to Health Care, specifically biotech's stellar performance.
  • Active management had a difficult month, as the market benefited from bond proxies and biotechs, which managers tend to be underweight relative to the index. In a month where low quality outperformed, Value performed best with only 23.4% of managers beating their respective benchmarks. For the year, Growth managers have had the most success with 59.6% outperforming, while Value managers are split at 50.2%.
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