It’s fair to say 2017 has not turned out as expected.
Even allowing for the unpredictability of the Trump presidency, things have taken a strange turn.
Many predicted that Trump’s reign would be a boon to smaller, domestically-focused firms on the back of tax reforms and trade restrictions. On the other hand, multi-national mega-caps were expected to suffer under the influence of those policies and a strengthened dollar.
However, this has not been the case. So far this year, the small-cap Russell 2000 has advanced 5.8%, trailing the large-cap Russell 1000, which is up 10.5%.
Small cap growth stocks are up on this, the Russell 2000 Growth hit 10.9% at the end of July, but they still trail their large cap equivalents with the Russell 1000 Growth up 17%.
But things could be about to change again.
Former Citywire cover star Burt White believes small caps present a tactical opportunity, should Trump’s administration succeed in lowering the corporate tax rate in 2018.
White, who is chief investment officer at Boston-based broker-dealer LPL Financial, said: ‘The primary reason for our optimism is the amount of skepticism toward the Trump administration’s ability to move its policy agenda forward, particularly with regard to tax reform. Small-cap stocks benefit disproportionately from a lower corporate tax rate because of their greater domestic focus.
‘We believe the potential for the US dollar to reverse its recent weakness is another reason why small caps are worth considering as a tactical idea at this time.’
White’s call did not come without caveats, though, particularly given the obstacles facing the Trump regime’s tax plans, the late stage of the business cycle and what are already relatively high valuations.
For investors looking to make this tactical play, which managers are worth backing?
The $302.5 million Driehaus Micro Cap Growth fund, managed by Citywire AA-rated Jeff James and AAA-rated Michael Buck, sits at the top of the Small Cap Growth category based on three-year risk-adjusted returns to the end of July.
On a total return basis, the fund sits third out of 142 funds, beaten only by the AMG Managers Cadence Emerging Companies fund, which also has impressive risk-adjusted numbers (see below), and the Virtus KAR Small Cap Growth fund.
Launched as a strategy back in January 1996, the Driehaus mutual fund has been managed by James and Buck since 2013. It has 127 holdings and takes an opportunistic approach in a bid to outperform the Russell Microcap Growth index over full market cycles. In the second quarter of this year, it returned 8.6% net of fees, while the benchmark rose 5.3%.
Outperformance has been found in healthcare, technology, consumer discretionary and staples, via names such as GTT Communications, Tactile Systems Technology, Tivity Health, Loxo Oncology and Fox Factory, which made up its top five holdings to the end of June.
Last week the managers announced plans to soft-close the fund at the end of the month, so interested investors will need to move quickly.
One other name that leaps out from the table below is that of AAA-rated Henry Ellenbogen, who runs the $20.4 billion T. Rowe Price New Horizons fund. He's been rated by us for his risk-adjusted returns every month for the past three years; he was AA-rated or higher for 21 of those 36 months.
Ellenbogen took over the fund in 2010, having previously managed its private equity investments. He has put that background to good use too, investing in a number of non-listed stocks prior to their IPOs, including Snap, Twitter, food delivery group Grubhub and software maker Atlassian.
Over the past eight years, he has invested a total of $539 million in such firms, doubling his money. These are not just speculative start-up bets though; Ellenbogen’s success has partly come from selling at the right time, as he managed to do with Twitter. ‘The goal of our early-stage holdings is consistent with the fund’s mission: to invest in small companies that compound wealth for our shareholders and become large companies,’ he wrote in the fund’s most recent annual report, published earlier this year.
‘Our goal is to own leading companies. Constantly updating our understanding of private market innovation and competition is a valuable part of our process.’
There is one downside though: the mega fund – which accounts for 16.4% of all the assets in the category – is currently closed to new investors.