Size and style are always significant factors in active portfolio manager performance, but 2017 so far is one for the record books.
As of August 2017, Small Cap Value has underperformed Large Cap Growth by the largest degree in 15 years, and to a greater extent on a percentage basis than even the 2008-2009 financial crisis.
The first chart* below illustrates this observation on a relative basis (Rebased to 1.0) since 2003.
The second chart* emphasizes the intensity on a relative percentage change basis (Rebased to 0%), which is the largest divergence in 10 years.
This may also be a symptom of a larger phenomenon that has been present in the post-financial crisis equity markets.
Periods of size and style relative performance were once longer term in nature, typically spanning 5 years or longer from 1978 to 2007. However, over the 10 years since then, these cycles have become shorter, lasting for 3 to 5 quarters. These recent cycles do have some underlying economic causes, but the symmetry of them has almost become mechanical/technical in nature, not driven by fundamentals.
For example, in the chart* below, you can see that the Citi Economic Surprise Index has generally trended with the relative performance of Small Cap Value vs Large Cap Growth. However, over the last 5 years the two have only been loosely linked, with a correlation coefficient of 0.47. More recently, these correlations have tightened to 0.57 over the last 3 years, 0.69 of the last 2 years, 0.75 over the last 12 months and 0.79 year-to-date.
Our conclusion is simply that the relationship has become more sensitive to these changes, presenting opportunities at times to generate alpha.
With that in mind, it is striking to us that the Citi Economic Surprise Index began to rise from the recent June 2017 lows, while Small Cap Value has not yet seen its relative performance tick up….yet.
Given the data above, we expect that the tide will soon turn back in favor of smaller caps and value in general.
As long/short small/mid cap value managers (general long small value and short mid growth), these cycles tend to have outsized impacts on the Goodwood Capital Management portfolio returns.
Interested in learning more about our long short small-mid cap strategy?
Check out our strategy overview or read our quarterly commentary.
*Source: Wilshire US Small-Cap Value Total Return Index; Wilshire US Large-Cap Growth Total Return Index
ABOUT THE AUTHOR
Ryan Thibodeaux is President / Portfolio Manager of Goodwood Capital Management.
Ryan founded Goodwood Capital Management, LLC in March, 2012 and serves as a Portfolio Manager. Prior to starting Goodwood, Ryan was a Partner and Senior Equity Research Analyst with Maple Leaf Partners, LP. Maple Leaf Partners is a long short equity hedge fund started in New York by Dane Andreeff in 1996. In 2003, Julian Robertson’s Tiger Management seeded Maple Leaf and it became what is commonly referred to as a “Tiger Seed.” The firm eventually grew to over $2 billion in assets under management.
To read Ryan Thibodeaux's full bio or other Goodwood team members, click here.