US fund managers are preparing themselves for further volatility in small caps as investors switch f...
US fund managers are preparing themselves for further volatility in small caps as investors switch from sector to stock specific strategies.
The recent global correction in tech stocks has had a knock on effect on the benchmark Russell 2000. In 1999 and the first part of this year it has been driven up by investor appetites for new economy stocks, often at lower prices than the blue chips.
Now that the theme based investing looks as if it is running out of steam, at least in the short term, a resurgence in value and old economy investment looks likely.
Following dollar gains of 21.3% in 1999 the scale of the fall out from tech has been impressive.
The Russell reached a high of 614.16 on 10 March, but has since given up many of its gains and stood at 504.75 on 5 April. That broadly mirrors the performance of Russell 2000 Tech sub-index high of 530.84 on 10 March, and value of 321.96 on 5 April.
Jonathan Price, product manager at Fleming Asset Managers USA, remains confident about a continuation of upward growth, and says: "There is a lot of comment about the overvaluation of the US stock market, but if you look deeper into the figures there is still a very wide skew of what is over and under-valued in terms of P/Es. Tech and telecoms are trading at high prices, but other sectors are trading at very reasonable levels."
He thinks the downward correction in tech stocks offers opportunities for bottom-up stock pickers with longer term investment horizons to buy quality tech sector companies at more reasonable prices in a healthy macro-economic climate with inflation under control, low unemployment and low interest rates.
James McLellan, director of US Equities at Clerical Medical Investment, puts the performance of the Russell in 1999 down to the tech and biotech stories.
"He says: "The small cap tech stocks mirrored the performance of the Nasdaq rather than the S&P 500."
In his eyes the Russell 2000 benefited from momentum investors looking further down the scale at smaller cap growth stocks rather than competing for high priced, big-named stocks like Texas Instruments, Cisco or Microsoft.
Now he sees the next few weeks as a time for more discriminatory investing to come to the fore, spreading investment more evenly across the sectors. He says: "My hope is that the market will not get so narrowly focused again and you will not have to be a tech name to perform." Thomas D'Auria, senior portfolio manager at HSBC Asset Management in New York, thinks the scale of future falls in tech can be exaggerated.
He points out there is a lot of indexed money in the Russell 2000 which cannot simply be switched out. Secondly he thinks there are still plenty of reasons to go for small caps.
He says: "You will see money continue to go in because since October, small and medium caps have far out performed S&P 500. We are starting to see managers step up and say that they now recognise there is a lot of value down there."
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