The investment criteria for US smaller companies funds may be altered in the wake of a rebasing of t...
The investment criteria for US smaller companies funds may be altered in the wake of a rebasing of the Russell 2000 index, writes Leo Bland.
Russell 2000, the main investment universe for US small cap fund managers, was rebalanced at the end of June in a move which saw the 116 largest companies within it move into the Russell 1000 index.
The rebasing has led to the size of the largest cap stock in the index falling to $1.6bn from around $9bn.
Autif's investment regulations state US smaller companies funds must have at least 80% of their assets in stocks with a market cap no bigger than the largest stock in the Russell 2000 and the rebalancing is causing a potential problem for some fund management groups preferring to focus on medium sized stocks in their US smaller cap portfolios.
The Autif Performance Category Review Committee is to meet next month to decide how to reform its investment criteria for US smaller companies funds.
One possibility is to change the rule to say that funds must focus on the bottom 10% of the market by market cap rather than looking at particular indices.
Perpetual's US smaller companies fund looks to invest in stocks with market caps of between $1bn and $5bn and the fund would have to be restructured if the current Autif investment rules were kept in place.
Grant Cowley, who runs Perpetual American Smaller Companies, said: "We have tended to run a more mid-cap fund here. Firstly, these companies tend to be more actively followed by Wall Street, so the research is better. Secondly, there is the liquidity issue which we are concerned with as active fund managers. Thirdly, it is easier to see these mid cap companies, for example at conferences. This area of the market is also seeing very good earnings growth and very good revenue growth.
"The rebasing of the Russell 2000 has seen sector weightings change quite considerably. The technology weighting in the index has fallen to 23% from 30%, while consumer services, utilities, basic industries and basic materials have gone up in terms of weighting."
Gartmore said the changes to the Russell 2000 mean its US smaller companies fund can now invest in more of the index.
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