The Short View

August 1, 2013 7:01 pm

Smaller is better as US recovery rides on

Investors are often advised that past performance is no guarantee of future results.

Entering August, equities remain heavily in favour among investors and one sector is leading the charge: small capitalised companies riding the wave of a US economy gaining altitude.

The Russell 2000 equity index sits in record territory, as does the S&P 500 index of large companies, many of which are exposed to the global economy.

Since the start of May, the small index has trumped its bigger and better known rival with superior monthly gains. While US large-cap stocks have delivered a handsome return of 19 per cent this year, sticking with small and largely domestic-orientated companies has generated an upside of some 25 per cent.

The performance of the Russell 2000 is not even a contest when compared with the big slide we have seen across emerging market shares this year.

The stellar run for small caps raises the question of whether investors should take a closer look at opportunities in global markets or switch into multinational S&P companies.

One factor to consider is the dollar, as further strengthening would favour sticking with domestic companies and not those reliant on global sales.

A deeper dive into the Russell 2000 index also reveals that small caps are ideally placed to benefit from a strengthening US recovery, highlighted on Thursday by manufacturing data from the US Institute for Supply Management which showed growth in July at its best pace since the spring of 2011.

Unlike the companies in the S&P 500, small caps have a bigger weighting of industrials, a sector that has outperformed this year. Another plus is the lower weighting of consumer defensive and energy stocks in the Russell 2000 versus the S&P 500.

Investors often struggle to time their exit from a bull run and risk staying too long. But for August, robust US data will foster further leadership from smaller companies.

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