NEPC’s Jennifer Appel and Nedelina Petkova were quoted in a recent FIN News article highlighting recent interest in the small-cap space. Read excerpts below or view the full article on FIN News’ site here.
Publicly-traded large-cap companies continue to garner the attention of media and investors, but allocator interest is beginning to look down market to the small-cap sector.
. . .
Following the outsized performance in the U.S. large-cap space in 2023, investment consultant NEPC is not surprised the data shows increased interest in the small-cap space.
“Investors are likely looking for places to put capital to work with large-cap valuation extended relative to history and growth expectations being outsized in the near-term. We are also not expecting a recession this year given the resilient economic backdrop, further supporting the trend,” Senior Investment Directors Jennifer Appel and Nedelina Petkova said, in a joint e-mailed response to questions.
. . .
To NEPC’s Appel, who aides in setting the firm’s macroeconomic outlook, dynamic asset class views and capital market assumptions, as well as Petkova, who oversees long-only global equity strategies, small-cap exposure is often associated with higher expected growth rates than their large-cap counterparts.
“Further, many small-caps are more directly exposed to their domestic economy as opposed to the geographically diversified return streams that are present in many large multinational companies,” they said, adding that “small-cap assets generally reflect less efficient portions of capital markets and can be fruitful areas for active management to add value as a result.”
In a recent NEPC webinar Where is the Value in Equities?, Petkova indicated there is significant dispersion in smaller-cap spaces including U.S. small-cap, ACWI ex. U.S. small-cap and emerging markets small-cap, which supports the view that those areas can be “alpha rich” as they are less efficient and therefore, specialized manager skill can be “integral.”
“Utilization to global mandates can help investors outsource U.S. versus non-U.S. in that decision, optimizing overall performance by considering the interactions there. There also is inherent flexibility to invest across more regions and countries, adapting to changes and market conditions and for managers to take advantage of new investment opportunities as they arise,” Petkova said, in the webinar.
. . .
Small-cap names notably have an elevated sensitivity to interest rates and while markets began expecting a dramatic path lower for the Fed Funds rate that fueled a strong year-end rally across equity markets, NEPC finds the dynamic may have increased interest in the space.
“As 2024 has progressed, many of those rate cuts have been squeezed out as the economy shows continued resilience and inflation pressures have re-accelerated. While small-caps appear relatively attractive on a valuation basis versus large-caps, we expect more caution on the space in the near-term as higher-for-longer rates and stickier inflation levels are likely to weigh more significantly on smaller firms than large,” Appel and Petkova said.