With supply shortages and strong consumer demand pushing U.S. inflation to a three-decade high, we believe current conditions combined with historical precedent make a strong argument for investors to consider small-cap value equities. The three conditions we view as instrumental to small-cap value outperformance—growing gross domestic product, rising inflation, and increasing rates—have all remained operative.
The Federal Reserve’s (Fed’s) recent removal of the word “transitory” from its statement on inflation is likely to draw investors’ attention to the fact that small-cap value has outperformed inflation over every decade dating back to the 1930s, according to Strategas Research Partners. In contrast, small-cap growth stocks failed to do so over two decades: the 1970s and the 2000s.
In addition, Furey Research Partners, LLC, has identified small-cap value’s outperformance over small-cap growth when inflation has equaled or exceeded 2%.
In our view, a rotation to small-cap value by strategists, consultants, and asset allocators should become more pronounced once the outlook for a more enduring bout of inflation becomes more broadly publicized.
Our pure small-cap-focused investment approach seeks value investment opportunities that exhibit one or more of these key characteristics at purchase: neglected, oversold, thematic, and earnings turnaround. Key features of our process include:
- A contrarian approach that seeks quality companies with short-term impairments
- Disciplined bottom-up fundamental analysis, with particular attention given to the cash-flow-generating capabilities of targeted companies
- A focus on avoiding unintended risk exposures when building portfolio positions, in pursuit of high alpha with low volatility
All investing involves risks, including the possible loss of principal.
There can be no assurance that any investment strategy will be successful. Investments fluctuate with changes in market and economic conditions and in different environments due to numerous factors, some of which may be unpredictable. Each asset class has its own risk and return characteristics.