Published: Sunday, April 24, 2011
Small-cap stocks lead market performance
LOS ANGELES -- Smaller stocks far outraced their blue-chip brethren in the last decade. Now, they're sprinting well ahead once again, defying predictions that big-name shares would take the lead in market performance.
Mutual funds that own stocks of small-cap and mid-cap companies racked up gains of 6.9 percent to 9.4 percent, on average, in the three months that ended March 31, according to fund tracker Lipper Inc.
By contrast, large-cap stock funds posted first-quarter total returns averaging less than 6 percent.
The story was much the same in 2010, when small-cap and mid-cap funds generated gains of 20 percent or better versus returns in the mid-teens for large-cap funds. A fund's total return includes the change in its share price plus any dividends it pays.
In part, the continuing performance streak of smaller stocks reflects Wall Street's growing sense that the U.S. economy is unlikely to fall off a cliff again. When investors conclude the economy will keep improving, they naturally become willing to bet on riskier enterprises, including smaller firms.
"Small companies tend to be more focused and less diversified than bigger ones. This can be fatal during recessions but may be a big positive during expansions," said Edward Yardeni, head of Yardeni Research Inc. in New York.
Don Wordell, manager of the RidgeWorth Mid-Cap Value Equity fund in Orlando, Fla., notes that the U.S. financial system has healed further over the last year and that private-sector job growth finally has begun to pick up.
"When I look at the overall environment, I am more encouraged" about the economy, he said.
Still, many market pros had expected investors to shift their focus to blue-chip shares this year. One argument in favor of big-name multinational stocks was that their global reach offered better potential growth prospects in 2011 than those of many smaller, niche companies.
Another argument was simply that large-cap stocks had become bargains relative to earnings as many investors ignored them and chose other places for their money in 2010 -- not just smaller stocks, but also commodities and corporate bonds.
Classic "value" investors such as Jeremy Grantham, co-founder of money manager Grantham, Mayo, Van Otterloo & Co. in Boston, were making the case for big stocks over other ideas early this year. In a letter to clients in January, Grantham described the highest-quality blue-chips as "very cheap."
Mutual funds that own stocks of small-cap and mid-cap companies racked up gains of 6.9 percent to 9.4 percent, on average, in the three months that ended March 31, according to fund tracker Lipper Inc.
By contrast, large-cap stock funds posted first-quarter total returns averaging less than 6 percent.
The story was much the same in 2010, when small-cap and mid-cap funds generated gains of 20 percent or better versus returns in the mid-teens for large-cap funds. A fund's total return includes the change in its share price plus any dividends it pays.
In part, the continuing performance streak of smaller stocks reflects Wall Street's growing sense that the U.S. economy is unlikely to fall off a cliff again. When investors conclude the economy will keep improving, they naturally become willing to bet on riskier enterprises, including smaller firms.
"Small companies tend to be more focused and less diversified than bigger ones. This can be fatal during recessions but may be a big positive during expansions," said Edward Yardeni, head of Yardeni Research Inc. in New York.
Don Wordell, manager of the RidgeWorth Mid-Cap Value Equity fund in Orlando, Fla., notes that the U.S. financial system has healed further over the last year and that private-sector job growth finally has begun to pick up.
"When I look at the overall environment, I am more encouraged" about the economy, he said.
Still, many market pros had expected investors to shift their focus to blue-chip shares this year. One argument in favor of big-name multinational stocks was that their global reach offered better potential growth prospects in 2011 than those of many smaller, niche companies.
Another argument was simply that large-cap stocks had become bargains relative to earnings as many investors ignored them and chose other places for their money in 2010 -- not just smaller stocks, but also commodities and corporate bonds.
Classic "value" investors such as Jeremy Grantham, co-founder of money manager Grantham, Mayo, Van Otterloo & Co. in Boston, were making the case for big stocks over other ideas early this year. In a letter to clients in January, Grantham described the highest-quality blue-chips as "very cheap."
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