worth april 2015 small cap
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Last year was a challenging one for U.S. small capitalization stocks rela-tive to their large capitalization peers. The Russell 2000 Index returned 4.9 percent versus 13.2 percent for the Russell 1000. This was the largest dis-parity in returns between the two indexes since 1998.
We believe investors who less-ened their exposure to small caps in 2014 should consider returning them to a more significant weight within their portfolios.
Following periods of extreme under-performance, the subsequent relative performance of small caps has often been quite strong. Since 1972, the Rus-sell 2000’s six most difficult periods of performance have been followed by returns of 12.2 percent on average over 18 months, versus 6.5 percent for the Russell 1000. The three-year return dif-ference has been even stronger, with small caps returning 28.7 percent, ver-sus just 11.9 percent for large compa-nies. We find the historical context encouraging and believe this could ultimately wind up being an attractive entry point for small caps.
Investors can play upon several unique factors that make small caps an attractive long-term investment. First, small caps typically provide access to companies with higher growth potential:
It’s generally less challenging to accel-erate the sales of a $25 million com-pany than one with sales of $25 billion.
Second, small companies offer inves-tors a greater universe of opportunity. Wall Street analysts focus the majority of their efforts on roughly 20 percent of all publicly traded companies—those with market capitalizations above $1.5 billion. This leads to an astounding number of companies that are over-looked. A portfolio manager can take advantage of this scant coverage to add significant value.
Current macro factors also provide a possible short-term opportunity for small cap investments. The dollar appreciated 12.8 percent against a basket of world currencies in 2014. While this strength likely won’t be as pronounced going forward, the trend could continue, given the improve-ments in the U.S. economy. Companies in the Russell 2000 obtain approxi-mately 81 percent of their revenues from within the United States, capi-talizing on improving U.S. economic strength while being less exposed to the weakening exchange rates felt by larger companies.
Increased merger and acquisition activity may also continue in 2015, pro-viding a nice tailwind to small caps. U.S. dealmakers are emboldened by
historically low interest rates, strong employment and record stock prices. Plus, challenged organic growth allows larger companies to feel comfortable using their abundant balance-sheet cash to achieve growth by acquiring smaller franchises.
It’s important to remember that investing in small companies comes with specific risks. Small cap stocks are more vulnerable to financial risks and other risks than stocks of larger companies. They also tend to be less liquid and trade with lower frequency and volume than larger-company stocks, which tends to make them more volatile and difficult to exit quickly. Also, the inefficiencies in research that can benefit investors may also lead to challenges and sur-prises if ongoing diligence is not maintained. Lastly, small caps valua-tions historically trade at a premium of 10- to 20 percent to large-cap stocks. As capital flows into small companies in response to improved economic data, valuations often spiral higher.
We draw comfort from the fact that small caps have rebounded from extreme performance gaps versus large-caps in the past and believe that they remain highly relevant in the construction of a well-diversified equity portfolio.
Chicago, IL Leading Wealth Advisor
Should I remain constructive on U.S. small caps?
Neuberger Berman Wealth ManagementBrian E. Hahn, Managing Director; Christopher J. DeMonte, CFA®, Senior Vice President; Seth A. Yerk, CFA®, Vice President
By Brian E. Hahn, Christopher J. DeMonte, Seth A. Yerk
This material is presented solely for informational purposes and nothing herein constitutes investment, legal, accounting or tax advice. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. Investing entails risks, including possible loss of principal. Past performance is no guarantee of future results. All information is as of December 31, 2014, unless otherwise indicated. Firm data, including employee and assets under management figures, reflect collective data for the various affiliated investment advisors that are subsidiaries of Neuberger Berman Group LLC. Neuberger Berman LLC is a registered investment advisor and broker/dealer, and member, FINRA/SIPC. Alternatives and fixed-income products and services are generally available through affiliates of Neuberger Berman LLC. Financial planning analysis, tax-planning and trust and estate administration services are offered by Neuberger Berman Trust Company N.A., an affiliate of Neuberger Berman LLC. The “Neuberger Berman” name and logo are registered service marks of Neuberger Berman Group LLC. ©2015 Neuberger Berman Group LLC. All rights reserved.
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Richard P. Slaughter Associates Inc. 13809 Research Blvd., Suite 905, Austin, TX 78750 512.918.0000
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Neuberger Berman Wealth Management 190 South LaSalle Street, 24th Floor, Chicago, IL 60603 312.325.2223Neuberger Berman Wealth Management 190 South LaSalle Street, 24th Floor, Chicago, IL 60603 312.325.2223Neuberger Berman Wealth Management 190 South LaSalle Street, 24th Floor, Chicago, IL 60603 312.325.2223
“We believe that investors who lessened their exposure to small caps in 2014 should now give consideration to returning them to a more significant weight within their portfolios.”—Brian E. Hahn
How to reach The Hahn Team
Any member of our team may be reached at 312.325.2223. We look forward to hearing from you.
Minimum Fee for Initial Meeting None required
Minimum Net Worth Requirement $5 million
Financial Services ExperienceHahn, 24 years; DeMonte, 20 years;Yerk, 10 years
Primary Custodian for Managed AssetsJ.P. Morgan
Compensation MethodAsset-based fees
Professional Services ProvidedInvestment advisory, wealth planning, trust and � duciary services
Email [email protected]@[email protected]
Website www.nb.com
Left to right: Seth A. Yerk, Brian E. Hahn, Christopher J. DeMonte
About Neuberger Berman Wealth Management, The Hahn TeamWealth management is part of Neuberger Berman’s DNA. The Firm was founded to manage assets on behalf of individuals, families and their charitable organizations. Now, 76 years later, as a global investment management organization overseeing more than $250 billion across all asset classes, Neuberger Berman’s wealth management business still remains a central focus. For nearly 20 years, the Hahn Team has been a leading advisory group within Neuberger Berman’s wealth management business, creating customized investment solutions for individuals and their families. Currently overseeing about $1.4 billion in private client assets, the Team’s mission is accomplished through the active management of investments, while incorporating a strong understanding of each client’s tax, estate planning, insurance, philanthropic and banking and credit needs. This integrated approach is a collaborative one, leveraging the expertise of lawyers, accountants, and other professionals involved in the client planning process. Through a commitment to active listening and prioritizing what is most important to clients and their families, The Hahn Team strives to make complex issues more manageable, while keeping clients informed, actively engaged and financially secure over the long term.
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Brian E. Hahn Managing Director
Christopher J. DeMonte, CFA® Senior Vice President
Seth A. Yerk, CFA® Vice President
Neuberger Berman Wealth Management 190 S LaSalle Street, 24th Floor
Chicago, IL 60603Tel. 312.325.2223