US small caps have been mostly out of favour when compared to their large cap counterparts over the past few years, as their performance has languished.
The S&P 500 index has returned 27.5% over the past three years, whereas US small caps, as represented by the Russell 2000 index, are down 2.1% over the same period.
Smaller companies were hurt more during the 2022 inflationary and interest rate hiking period as they often face higher borrowing costs and lack pricing power compared to their larger peers.
They are also typically shunned by investors during periods of economic uncertainty as market participants tend to exhibit a flight to quality.
However, history suggests that over the long run, small caps tend to outperform large caps due to their higher growth potential, under researched nature and higher sensitivity to the economic cycle.
For investors looking for a broadening out of US equity markets as the Fed gears up to cut interest rates, a small cap allocation might be garnering interest.
Year-to-date, US small caps are still lagging large caps, with the Russell 2000 index up 7% return versus 16.8% from the S&P 500 index.
Some actively managed small-cap funds however are outpacing the index year-to-date and FSA highlights five such funds below*.
Heptagon Driehaus US Small Cap Equity
This fund is up 16.5% year-to-date and is managed by Jeff James, Michael Buck and Prakash Vijayan out of Chicago, US.
The strategy has $4.1bn in assets and follows a growth investment style, with 104 positions.
It currently has a substantial underweight to the IT sector (15.7% versus 24%) compared to its benchmark Russell 2000 Growth index.
Its largest holdings are in Crinetics Pharmaceuticals, TransMedics Group and ATI Inc.
Janus Henderson US Small-Mid Cap Value
This fund is up 14.9% year-to-date and is managed by Kevin Preloger and Justin Tugman out of Denver, US.
This strategy follows a value investing approach, with slightly higher concentration than other funds with just 50 holdings.
Its largest positions are in Lazard, Axis Capital Holdings and Agree Realty Corp.
New Capital US Small Cap Growth
This strategy is up 13.5% year-to-date and is managed by Joel Rubenstein, Mike Clulow and Chelsea Wiater out of Portland, US.
This growth strategy has a slight overweight to healthcare stocks and underweight to industrials. It has 91 holdings.
Its largest positions are in Insmed, CommVault Systems and Glaukos Corporation.
Indosuez America Small and Mid Caps
This fund is up 10.9% year-to-date and is managed by Laura Corrieras and Michel Bourgon out of Luxembourg.
It has a substantial overweight to the financial services sector as well as a notable underweight to the healthcare and real estate sectors.
Its largest positions are in Hercules Capital, EMCOR Group and Pathwood Financial.
Artemis Funds US Smaller Companies
This fund is up 9.61% year-to-date and is managed by Cormac Weldon and Olivia Micklem out of London, UK.
This strategy follows a growth investing approach and is also relatively concentrated, holding between 40 and 60 stocks at any point in time.
Its largest positions are in Jefferies Financial Group, Burlington Stores and Core & Main.
*The top-performing funds were measured in US dollar terms. The performance is based on data from FE fundinfo ending 4/9/2024. The funds only includes fund vehicles that fall under the Hong Kong SFC Authorised Mutual or Singapore Mutual equity sectors as classified by the FE fundinfo platform.
