In observing the equity markets, several factors suggest US large-cap stocks will outperform their s...
In observing the equity markets, several factors suggest US large-cap stocks will outperform their smaller counterparts. It also seems relatively more attractive opportunities exist within the growth equity portion of the US market.
Since the Russell 1000 index (a US large-cap stock index) and the Russell 2000 index (a US small-cap stock index) began, the nine-year period ending 31 December 2007 represented the longest period one style has outperformed relative to the other (small-cap outperformed from 1979-83, large-cap from 1984-90, small-cap from 1991-93 and large-cap from 1994-98). It is reasonable to expect that an eventual reversion in relative performance may occur.
A compelling case for large-cap stocks may be found in their P/E ratios. In part owing to the underperformance of large-cap stocks this decade, the valuations for large-caps relative to small-caps (as measured by P/E ratio) are at their lowest levels since 1994.
The case for growth now is similar to that for value back in 1999 and 2000, when value significantly underperformed for several years prior to its outperformance for seven years over growth (1 January 2000 to 31 December 2006). This most recent large-cap value stock cycle was the second longest in terms of magnitude and duration, following the longest bull market for large-cap growth stocks (1 January 1994 to 31 December 1999).
Even factoring in the past calendar year, it seems large-cap value stocks have outperformed large-cap growth stocks by 3.9% annually over the past 10 years (ending 31 December 2007). Our observations are that large-cap growth stock cycles tend to be shorter in duration; however, performance tends to be greater in magnitude relative to large-cap value stock cycles.
Despite the condition of the US economy, many US-traded companies are benefiting from trends and growth outside of the US economy. This suggests active investment managers that invest with conviction have opportunities to find attractive investments in the US despite the overall condition of its economy.
This is not a call to abandon smaller-cap or value asset classes. Sound asset allocation across all market caps and strategies remains important.
- US large-caps should outperform smaller counterparts
- Relatively more attractive opportunities exist within the US growth equity market
- This is not a call to abandon smaller-cap or value asset classes
Dan Wasiolek, Driehaus Capital Management LLC, portfolio manager of VAM Funds (Lux) US Large Cap Growth.
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