Tapping into the growth potential of small-cap stocks

Tapping into the growth potential of small-cap stocks

  • 2020 was the first time since 2016 that small caps outperformed large caps.
  • Changing economic cycles may remind investors to revisit their allocations.
  • History suggests small cap stocks can play an important role in a retirement portfolio.

On January 3, 2021, my family witnessed a rite of passage. Our first born, twins in our case, turned 18. It is hard for this milestone not to trigger introspection.

Was it only 18 years ago these newly minted adults were helpless infants? Was it only 18 years ago these high school seniors relied on us for everything? Wow.

These life events often trigger reflection; perhaps that reflection is intensified given current economic challenges brought on by the pandemic.

In investing terms, our “small cap” infants have grown up to be “large cap” independent adults. Right behind them we have up and coming “mid caps” in ninth and eighth grade.

The list of Russell 2000 components as of 2003 (courtesy of Bloomberg) reveals that only 18 years ago, companies as well known today as Southern Co. Gas; SanDisk LLC; TD Ameritrade Holding Corp.; Louisiana-Pacific Corp.; American Tower Corp.; Coinstar LLC; Cisco WebEx, LLC; Marvel Entertainment, LLC; and even Netflix, Inc., were small cap companies.

Of course, some of the 2003 Russell 2000 component companies are not well known today or even still in business.

The reason for bringing this to your attention is to highlight recent investment results have included years of large-cap stocks dominating small-cap stocks. In fact, 2020 was the first time since 2016 that small caps outperformed large caps.

Three-year winning streaks like that of 2017-2019 can cause portfolios that are not reallocated to become unbalanced.

In addition, changing economic cycles may give investors an indication it is a good time to check their allocations. History tells us that when the economy emerges from recession, small caps tend to outperform large caps by about 5.00%/annum. This kind of wave, if you will, seems to last about three years. From September 9, 2020, thru February 12, 2021, small stocks have outperformed large stocks by 31.5%. (Russell 2000 vs Russell 1000 index).*

Retirement plan specialists, as you conduct plan reviews, do you have a well-diversified lineup across all core asset classes? Do you have the correct small-cap offerings and are participants using them correctly through rebalancing?

While my days of rearing “small cap” children may be behind me, history indicates small-cap stocks should likely remain an important part of my retirement portfolio and that of most participants. Just like there are many companies to choose from, there are many stock funds focused on small caps for plan committees to consider.

Putnam Small Cap Growth Fund seeks to identify companies that can deliver above-average growth for long periods of time, which we believe can result in superior rates of return. Portfolio Manager Bill Monroe utilizes deep fundamental research to construct a portfolio with exposure to high-quality growth names and to some of the fastest growing, most innovative companies in the small-cap space. We believe that our approach of anchoring the portfolio in quality growers, while supplementing that exposure with more aggressive growth, offers a complementary approach to investing in the small-cap growth universe.

Via the link at the top of this post, Putnam Fundvisualizer® can help you help plan decision makers find appropriate small-cap (and other) funds for their core menus. Fundvisualizer allows you to view and compare over 30,000 funds, ETFs, and indexes. You may also create presentations. Fundvisualizer is offered as free fund analysis software.

Now is the time. After recent rebounds and run ups in the market, use FundVisualizer to help you help plan sponsors recheck the make up of their lineups.

*Source: Putnam, 2021.

Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. Russell® is a trademark of Frank Russell Company.

The Russell 2000 Index is an unmanaged index comprised of approximately 2,000 of the smallest companies in the Russell 3000 Index as measured by their market capitalization.

The Russell 1000 Growth Index is an unmanaged index of those companies in the large-cap Russell 1000 Index chosen for their growth orientation.


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