Continued growth in technology stocks is masking the poor performance of the majority of smaller com...
Continued growth in technology stocks is masking the poor performance of the majority of smaller companies in the Russell 2000 Index.
So far this year the index is up 7.12% in dollar terms compared with a rise in the S&P 500 of 15.5%. The main contributor to the growth in the Russell 2000 are the technology companies within the index. In the year to date the technology sub-sector has grown by 59.71%, whereas the financial sub-sector has fallen by 4.7% and the consumer sector has risen only 4.2.2%.
Rupert Della-Porta, fund manager at Hill Samuel Asset Management, says: "It is not the right kind of environment for smaller companies interest rates have been raised which has had a tightening effect on the economy. This is restricting the growth of smaller companies which concentrate on the domestic market rather than large cap companies which sell globally."
Hill Samuel US Smaller Companies unit trust is overweight technology but is likely to take some profit from stocks which appear to have been over-bought. Della-Porta points out that average year to date growth for internet companies with projected losses is 50% in share price. Whereas the average year to date growth for companies with projected earnings is only 7 7%.
In light of the good performance of tech stocks Gartmore US Smaller Companies unit trust is overweight the sector. Around 40% of the portfolio is exposed to technology companies compared to an index weighting of 26%. Recently Nick Ford and Hugh Grieves, joint-managers of the fund, took profit from the sector reducing the portfolio weighting from around 47%.
Ford says: "Currently we are favouring internet companies in particular those which construct website platforms. Also companies developing business to business and customer to business software. These companies are benefiting from businesses all wanting to develop their communication structures."
One problem with the outperformance of technology companies is trying maintain a diversified portfolio while the majority of other sectors within the Russell 2000 underperform, according to Ford. One sector he does favour apart from technology is media and in particular advertising companies.
He says: "We hold Lamar Advertising, which has a lot of billboard sites and is benefiting in the growth of the number of internet sites being launched. To attract users new sites have to advertise and billboards is one way they are doing this. Another stock the portfolio holds is TMP Worldwide which is being very successful advertising online."
Della-Porta also believes there are other sectors within the smaller companies arena which are worth a look. He says: "The portfolio has exposure to oil services companies which should perform well with the rise in the oil price to $26 a barrel. Another piece of good news for the companies is Shell's announcement that next year its capital spending will be up 15%."
In addition financial companies which have discounted that there will not be another rise in interest rates until the end of the first or second quarter next year, look favourable according to Della-Porta. He says: "I expect there will M&A within the sector next year. Congress has recently repealed the Glass-Steagall Act which has prevented banks from owning insurance companies since the Wall Street crash."
Next year the majority of smaller companies will still encounter problems, according to Hill Samuel. Della-Porta expects continued growth in a low inflation environment but with the growth at a slower rate than it was this year.
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