Consistency of small cap returns across multiple market periods should be a strategic consideration for a long-term allocation to the asset class.
Outfielder Ty Cobb, whose career ended in 1928, had the highest batting average in Major League Baseball (MLB) history, batting .366 over 24 seasons.1 His consistency not his power over the long-term defined his success and legacy as one of the best major league baseball players of all time.
Often in strong rising markets, investors become myopic chasing performance in the highest performing strategies believing recent events will persist long into the future. After a long-secular rise in small cap stocks, strategic investors need to consider the importance of both absolute performance, risk-adjusted returns, and consistency which tend to be underappreciated in the volatility prone small cap asset class.
As price to earnings multiples and profit margins peak, avoiding marginal companies with a greater emphasis on high-quality companies trading at attractive prices will be increasingly important. We are already seeing this play out in the Russell 2000 Index where over one-third of the stocks in the Russell 2000 have not been profitable in 12 months, a level normally only seen in recessions.2 Strategic long-term investors should emphasize consistency through multiple market periods to complement unmanaged small cap beta or headline-grabbing high performers.
1 Source: https://www.baseball-reference.com/players/c/cobbty01.shtml
2 Source: Strategas Research Partners, 2019. Past performance is not indicative of future results.
Take Action: Learn How Westwood’s Approach to SmallCap Investing Can Improve your risk-return profile across multiple market periods.
Annualized Rolling 5-Year Returns Net of Fees Since Inception
Westwood SmallCap Value vs. Russell 2000 Value Index
Westwood SmallCap Value: Key Takeaways
A high-quality approach to small cap investing could be a way for investors to strategically allocate to the asset class to improve consistency over the long term.
We believe high-quality businesses that are operating well with undervalued earnings potential offer competitive risk-adjusted returns.
Focused best ideas portfolio with historically high active share. Number of securities typically ranges from 50 to 70.
Our strategy utilizes a team-based fundamental bottom-up approach to identify high-quality companies.