By Jack Fockler
We believe that equities continue to represent an attractive option, that fundamentals matter, especially on a long-term basis, and that stock pickers, i.e., active managers, are uniquely positioned to add value in the current market environment and beyond.
Despite a strong August, small-caps were unable to overcome a difficult July and an equally challenging September to continue their streak of positive quarterly performance, which lasted eight consecutive quarters.
In fact, it was the worst quarter for small-caps, as represented by the Russell 2000, since 9/30/11.
In addition, small-caps fell behind their large-cap counterparts for the second consecutive quarter, their worst relative quarterly performance since 3/31/99. The small-cap Russell 2000 Index was off 7.4% versus gains of 1.1% and 0.7% for the large-cap S&P 500 and Russell 1000 Indexes, respectively, for the third quarter. The tech-oriented Nasdaq Composite was up 1.9% for the same period.
Year-to-date through 9/30/14, large-caps retained and built on their 2014 performance advantage, with the S&P 500 and Russell 1000 up 8.3% and 8.0%, respectively, versus a loss of 4.4% for the Russell 2000. The Nasdaq Composite gained 7.6% for the same period.
Poor relative performance aside, the Russell 2000 still managed to establish a new high during the quarter, as did both the S&P 500 and Russell 1000.
Within the Russell 2000, Consumer Staples and Health Care were the leading sectors in the third quarter while year-to-date through 9/30/14, Utilities and Health Care were the top performers.
Trailing three- and five-year performance ended 9/30/14 was outstanding for the Russell 2000, S&P 500, and Russell 1000—average annual total returns exceeded 14% in each period for each index (WOW).
From the 10-year Treasury bond low on 5/2/13 through 9/30/14, overall equity returns were terrific. For this period, the Russell 2000 rose 19.5%, the S&P 500 was up 27.2%, and the Russell 1000 advanced 27.3%.
Non-U.S. equity results for the quarter were more in line with U.S. small-cap returns—for the third quarter, the Russell Global ex-U.S. Small Cap Index was off 6.2% while the Russell Global ex-U.S. Large Cap Index was down 5.4%. Year-to-date, returns for both non-U.S. indexes were sandwiched between their domestic counterparts. The Russell Global ex-U.S. Small Cap Index provided a slight edge, up 0.9% while the Russell Global ex-U.S. Large Cap Index returned 0.2%.
Within small-cap, growth outperformed value during the quarter and for the year-to-date period ended 9/30/14. For the quarter, the Russell 2000 Growth Index was down 6.1% versus a loss of 8.6% for the Russell 2000 Value Index. Year-to-date ended 9/30/14, the small-cap value index was down 4.7% versus a loss of 4.1% for the small-cap growth index.
Mid-cap returns fell between their large- and small-cap counterparts, with the Russell Midcap Index down 1.7% for the third quarter yet up 6.9% year-to-date through 9/30/14. In contrast, micro-caps continued to struggle, with the Russell Microcap Index down 8.2% for the quarter and off 6.8% for the year-to-date period.
Important Disclosure Information
This material is not authorized for distribution unless preceded or accompanied by a currentprospectus. Please read the prospectus carefully before investing or sending money. Investments in securities of micro-cap, small-cap, and/or mid-cap companies may involve considerably more risk than investments in securities of larger-cap companies. (Please see “Primary Risks for Fund Investors” in the prospectus.) Investments in foreign companies may be subject to different risks than investments in securities of U.S. companies, including adverse political, social, economic, or other developments that are unique to a particular country or region. (Please see “Investing in International Securities” in the prospectus.)
The thoughts concerning recent market movements and future prospects for small-company stocks are solely those of Royce & Associates, LLC, and, of course, there can be no assurances with respect to future small-cap market performance. All indexes referenced are unmanaged and capitalization-weighted. All index returns include net reinvested dividends and/or interest income. Russell Investment Group is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. Russell© is a trademark of Russell Investment Group. The Russell 2000 Index is an index of domestic small-cap stocks that measures the performance of the 2,000 smallest publicly traded U.S. companies in the Russell 3000 Index. The Russell 1000 index is an index of domestic large-cap stocks. It measures the performance of the 1,000 largest publicly traded U.S. companies in the Russell 3000 index. The Russell 2000 Value and Growth indexes consist of the respective value and growth stocks within the Russell 2000 as determined by Russell Investments. The Russell Microcap Index includes 1,000 of the smallest securities in the small-cap Russell 2000 Index, along with the next smallest eligible securities as determined by Russell. The Russell Global ex-U.S. Small Cap Index is an index of global small-cap stocks, excluding the United States, while the Russell Global Small Cap Index is an index of global small-cap stocks, including the United States. The Russell Global ex-U.S. Large Cap Index is an index of global large-cap stocks, excluding the United States. The S&P 500 is an index of U.S. large-cap stocks selected by Standard & Poor's based on market size, liquidity, and industry grouping, among other factors. The Nasdaq Composite is an index of the more than 3,000 common equities listed on the Nasdaq stock exchange. The performance of an index does not represent exactly any particular investment, as you cannot invest directly in an index.
