U.S. fund managers' big new bet - going small

Grand Canyon Education

14/06/2016 20:46

By David Randall 
    NEW YORK, June 14 (Reuters) - As the S&P 500 index of large 
companies flirts with a record high, many U.S. fund managers are 
opting to go small instead,  betting that small caps have more 
potential for appreciation.  
    Multi-cap funds - those run by fund managers who have the 
freedom to hold companies of any size - have nearly 20 percent 
of their portfolios in small-cap stocks now, the largest 
allocation over the last three years and a 6.5 percentage point 
jump from this time last year, according to Lipper data.  
    Fund managers say that they are attracted to smaller 
companies in large part because the Russell 2000, an index of 
small-company stocks, remains 12 percent below its record high 
of June 2015, suggesting that smaller stocks still are 
recovering from the steep declines brought about by plunging oil 
prices and concerns about the Chinese economy. 
    With retail sales and the job market improving in the United 
States, shares of smaller companies - which tend to get most of 
their revenue domestically - could have more room to run.  
    "We're seeing a lot of reach for quality and stability in 
the marketplace, with things like consumer staples and utilities 
trading at some of the largest premiums to the market that we've 
ever seen. On the other side of that trade is that small caps 
are being left for dead," said Connor Browne, portfolio manager 
of the $910 million Thornburg Value fund  IMOTX.O . 
    Browne, who has nearly doubled his holdings of small caps 
stocks to 36 percent of his portfolio over the last three years, 
said that he has been adding smaller companies such as 
for-profit education company Grand Canyon Education Inc  LOPE.O  
and Phibro Animal Health Corp  PAHC.O , which get nearly all of 
their revenues domestically.  
    The Russell 2000 is up slightly less than 1 percent for the 
year to date, compared with a 1.4 percent gain for the S&P 500. 
Yet it trades 9.3 percent below its level this time last year. 
The S&P 500, meanwhile, is down just 1 percent over that time. 
     
    BOUNCE OFF THE BOTTOM 
    Some of the interest in small companies now is a reflection 
of a bounceback in U.S. crude oil prices, which touched 13-year 
lows of $26.21 a barrel in February and eviscerated small energy 
producers. Oil rebounded over the spring, trading at $49.70 at 
midday Tuesday.  
    Scott Goginsky, a portfolio manager at the $20.4 million 
Biondo Focus fund  BFONX.O , said he more than tripled his 
allocation to energy stocks in the first half of the year, 
buying oil production companies such as Diamondback Energy Inc 
 FANG.O  and Sanchez Energy Corp  SN.N .  
    "It was clear that as long as these companies didn't go out 
of business, you would eventually make a ton of money because 
they were just so cheap," he said. 
    Goginsky is still adding to his positions in the sector 
because he expects there to be "considerably larger" increases 
in the year ahead as the price of oil stabilizes and draws more 
investors back in. 
    Sandy Villere, portfolio manager of the $417 million Villere 
Balanced fund  VILLX.O , said that small companies also stand to 
benefit should the Federal Reserve raise interest rates again 
this year. That would likely strengthen the dollar, cutting into 
the profits of multinational companies that generate more of 
their revenue overseas.  
    Villere has been buying shares of companies such as Taser 
International Inc  TASR.O , which outfits police departments 
with body cameras, in addition to making electroshock weapons. 
The shares represent 85 percent of Villere's assets, the maximum 
allocation to small-caps allowed by the fund's prospectus.  
    "We have as little cash as we've ever had," he said.  
 
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Small-cap vs. large cap performance    http://tmsnrt.rs/1UNvntl 
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 (Reporting by David Randall; Editing by Linda Stern and Steve 
Orlofsky) 
 ((David.Randall@thomsonreuters.com; 646-223-6607; Reuters 
Messaging: david.randall.thomsonreuters.com@reuters.net)) 
 
Keywords: USA FUNDS/SMALLCAPS