Nearly five years after the panic of March 2009, when stock prices dropped to the lowest levels in recent history, the U.S. equity markets have returned to the range of fair value. At around 1,800 the S&P 500 Index is trading at about 16.5 times estimated 2013 earnings, priced for a fair rate of return in the long run of between 7 and 9% - in line with historical averages. As such, the equity markets look neither cheap nor overvalued.
Small and micro cap stocks – securities with a market capitalization below $3 billion - offer investors a number of sustainable advantages when compared to other market cap segments. Consequently, they allow active asset managers focused on these stocks the potential to outperform over long periods of time. This is especially true of micro caps, which are typically valued at less than $1 billion.
A common approach to diversifying a U.S. equity allocation is to supplement a core of large-capitalization equity investments with an allocation to small-capitalization stocks. While simple to execute and intuitively attractive, such an approach overlooks the significant opportunities available in U.S. mid cap stocks.
Jay Feeney and Mark Donovan, Co-Chief Executive Officers: As life-long believers that the best means of achieving superior long-run investment returns is through “bottom-up” research on a stock by stock basis, we rarely contribute to the deluge of “Market Outlook” pieces that seem to proliferate in our industry.