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So one of the more interesting aspects of the market in 2019 was this outperformance of mega-cap companies. And it really started in the middle of 2018. That’s where the divergence began, and, unfortunately, continues. It continued all the way through the end of last year, in 2019. And the difference between mega-caps, small-caps, and micro-caps were enormous.
It was about 30% between what the mega-cap stocks did and what micro-cap stocks did at the end of last year. Part of what we expect to happen is that mega-cap stocks should take a pause, and any type of pause would hopefully benefit the smaller end of the asset class spectrum.
We saw that in the rotation that took place over the summer in 2019. Micro-cap stocks did incredibly well between that August 27th date of 2019 and the end of December of last year. And we think that’s a trend that’s going to continue.
Strong Showing For Micro-Caps
Index Returns—8/27/19-12/31/19
So you should see micro-cap companies doing better. You should see small-cap companies doing better, not just relative to large-cap companies, but relative specifically to some of these mega-cap companies that have done so well. So one of the, I think, unique aspects of our firm is that we’ve always been active in micro-cap stocks. They’ve always been a way for us to look at the broader market. It’s been an area that we’ve obviously been adding to over the past year, just giving the performance differential, and it’s an area that we will always continue to have exposure to in many of the larger portfolios.
I think micro-caps have a chance over the next five years to actually be an alpha generator for many active managers, especially within the small-cap space. So portfolios that have exposure to micro-caps should do better than the overall market, and you should see micro-cap companies, on a relative basis, catch up to the overall market.
The thoughts and opinions expressed in the video are solely those of the persons speaking as of January 13, 2020 and may differ from those of other Royce investment professionals, or the firm as a whole. There can be no assurance with regard to future market movements.
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