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Active Approach Boosts Small-Cap Value Funds

Active Approach Boosts Small-Cap Value Funds

August 11, 2022

Active managers are shining in a volatile market thanks in part to taking an active approach with small-cap value stocks.

While the overall market environment has been conducive to value investing, a recent article from Institutional Investor states that focusing on fundamentals, conducting thorough research, and taking an overall active approach has helped further improve the returns on small-cap value funds.

The article cites data from Investment Metrics, which provides analytics and data for institutional investors. It shows that small-cap value managers generated average excess returns of 2% in the second quarter, 2.1% year-to-date, and 5.4% over the trailing 12-month time frame. That makes small-cap value the “strongest performer among all active style peer groups in each time frame, based on their performance against the Russell style indexes.”

A main driver of the outperformance was a market environment that is simply conducive to value investing. According to Investment Metrics, all sub-factors in the value category outran the benchmark. Large-cap value managers also exceeded their benchmarks, but by smaller margins than their small-cap peers.

The Benefits of an Active Approach

But the market environment is only part of the puzzle. Institutional Investor writes that focusing on fundamentals and taking a more active investment approach have helped small-cap value managers achieve their gains amid market turbulence. According to the article, 86% of small-cap managers in the top quartile used fundamental research in their portfolios and 96% of those managers had high active share, while only 14% used a quant approach. Based on the research that top-performing managers conduct, many invest in fewer companies, which leads to more concentrated portfolios. For fundamental-tilted defensive managers, that can pay off in times of volatility.

In the words of Investment Metrics senior consultant Brendan Cooper, who was interviewed for the article, “If there’s volatility in the market, I think that is a chance for active fundamental managers to shine and improve their stock picking ability.”

For more, read the full article here.

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