The election of Donald Trump electrified small caps, and none more so than those at the value end of the investment spectrum.
Performance in the Small Cap Value sector bears this out, with every single one of its 96 funds delivering gains over the past 12 months, with an impressive average total return of 23.9%.
Trump’s promise of tax cuts and infrastructure spending sparked a stock market rally in the hope of accelerated US growth, which was particularly strong among more domestically focused small caps.
It was the typically more cyclical businesses, which caught the eye of value-focused managers in recent years, that benefited the most.
But the strongest returns came from those managers with a deep value approach, searching for the biggest bargains.
The tiny Schneider Small Cap Value fund tops the sector with a huge 77.3% return over 12 months, more than three times the average of the sector and well ahead of the next best over a year, Towle Deep Value, up 48.6%.
But it’s been a rocky ride for investors in the $47 million Schneider fund, run by the investment group’s founder, Citywire + rated Arnold C. Schneider. Although the fund may be sitting pretty at the top of the table over one year, it had been rooted to the bottom for the previous two, having lost investors a third of their money.
Key to the fund’s recovery has been Schneider’s aggressive bet on the beaten-up energy sector. The fund’s oil and gas holdings had weighed on returns in the lean 2014 and 2015, as the price of a barrel of West Texas Intermediate tumbled from a high of $107 to $37, placing extreme pressure on shale producers.
But after plunging to new lows at the beginning of 2016, the oil market appeared to find its bottom, with prices doubling, receiving added impetus from the historic decision of the Opec cartel of oil-producing nations to reduce supply.
An oil and gas position that had made up 14% of the fund in the summer of 2015 had surged to nearly a third of the portfolio the following year, and although Schneider is now reducing the position, he doesn’t believe the recovery is done. ‘Although we have reduced our energy exposure, we believe recent worries about shale growth beyond 2017 are somewhat exaggerated,’ he said.
Schneider Small Cap Value boasts an impressive long-term record, having doubled the return of the Russell 2000 index since launch in 1998. And although the Towle Deep Value fund hasn’t been around as long, having launched in 2011, it tops the sector over five years with a 126.8% return.
As with Schneider and many deep value funds, there have been some substantial ups and downs along the way: the fund has a maximum drawdown of 29% over five years, although that’s still lower than the Schneider fund’s 44.5%.
The long haul
Not that investors can say they weren’t warned. Manager Christopher Towle is keen to attract the right sort of investors to his fund, who are in it for the long term, warning of the fluctuations involved in small-cap investing and cautioning his fund ‘is not designed to provide investors a way to speculate on short-term movements’ in its literature.
The managers have even gone as far as restricting new investment in the portfolio earlier this year, an unusual move for a fund that only stands at around $170 million. For those that do get their money in, there’s a 2% fee on shares redeemed within 90 days of purchase. But so far, those who have been in for the long haul have been rewarded.
|Rank||Manager||Fund(s) managed||Total return (%)||5-year maximum drawdown|
|1 year||3 years||5 years|
|1/96||Arnold C. Schneider||Schneider Small Cap Value||77.3||16.8||74.4||-44.5|
|2/96||Towle Deep Value||48.6||37||127||-29|
|3/96||Craig D. Hodges; Eric J. Marshall; Gary Bradshaw||Hodges Pure Contrarian||39.3||1.1||55.9||-44.5|
|4/96||Scott Barbee||Aegis Value||37.7||-2.4||47.5||-50|
|5/96||Steven Adams||Small Cap Value||36||-1.9||60.2||-40.2|
|6/96||Boniface Zaino; William A. Hench||Royce Opportunity||33.9||13.5||76.1||-23.5|
|7/96||Candace King Weir; Amelia Weir||Paradigm Micro-Cap||31.4||24.9||73.4||-21.7|
|8/96||Jeremy H. Javidi||Columbia Small Cap Value||30.1||25.7||73.6||-15.6|
|9/96||Eric Harthun||Putnam Small Cap Value||30||24.2||82.9||-14.4|
|10/96||Deborah D. Woods; Robert Leung; Stephen Courtney; Mitchell B. Stern||Prudential QMA Small-Cap Value||29.9||29.1||83.8||-16.8|