Sentiment on US smaller companies is positive as the market broadens and becomes less reliant on the...
Sentiment on US smaller companies is positive as the market broadens and becomes less reliant on the performance of technology stocks.
Jonathan Price, product manager at Flemings says the Russell 2000 is probably the best performing index at present. It is currently outperforming both the S&P 500 index and the Dow Jones Industrials index. In dollar terms, the Russell 2000 grew 1.9% over the past year to 14 August, compared to the S&P's rise of 0.18% and the Dow Jones fall of 4.08%.
This is a change from what Price calls the "torrid time" of 1997, 1998 and early 1999 when smaller companies were significantly underperforming large caps. During this time, leadership in the US market was very narrow, led essentially by blue chips, such as General Electrics and Microsoft.
At the height of the tech boom Flemings smaller companies portfolios found it hard to take advantage of the technology surge as much of the performance was coming from the larger stocks. The group believes that the overall market has since broadened out and is no longer reliant for performance on the tech sector.
Price believes that "a lot of technology companies are over-stretched." As a result Flemings portfolio is underweight technology and overweight in the healthcare, consumer and energy sectors.
In particular, Price is very positive about the healthcare sector due to the technological advances in the shortening of the drug development process.
Flemings is particularly interested in genomics as a source for future market expansion.
So far the human genome project has identified up to 200,000 genes whereas at present drugs are only related to anything from 400-500 genes.
Zanny Perring, fund manager at Threadneedle, also sees the healthcare sector as being an area of visible growth and she too considers the mapping of the human genome as being crucial to this development.
Perring notes that the index now has a lower technology exposure. The Russell 2000 was rebalanced at the end of June, with the 116 largest companies moving into the Russell 1000 index.
As a result the technology weighting in the index fell to 23% from 30% while consumer services, utilities, basic industries and basic materials have gone up in terms of weighting.
Perring is more cautious in her outlook for small caps than Price, stating it is "no better and no worse than for the market in general." She believes that the market is fairly valued for both small and large stocks.
One possible negative for smaller companies is the growing investor uncertainty on the economic and company earnings outlook for the North American economy.
She says that in such periods small stocks are more vulnerable to extremes of trading due to their lower liquidity.
Ira Unschold, fund manager at Schroders, is very optimistic about the outlook for small-cap companies.
He says, now there is not as much mania for the buying of dot.coms as there was in 1999, while insurance stocks, such as property casualty, are doing very well, as are the financial and consumer businesses.
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