Small caps: It’s a big world

Written by: Global Thought Leadership | August 25, 2017

Source: Factset, as of 6/30/2017. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment. 

The Bottom Line

  • The opportunities available outside the U.S. in small-cap stocks are both numerous and diverse—and well worth considering for investors seeking a higher level of equity diversification. 
  • There are more than twice as many choices in small-cap stocks outside the U.S. than in it, and those stocks represent twice the overall market value ($4.6 trillion vs. $2.3 trillion).1
  • That’s a lot to digest, but the long-term performance of international small-caps is attractive enough to merit a deeper look.
  • Looking at the average annualized rolling monthly 10-year returns over the last two decades (July 31, 1996 through June 30, 2017) is instructive; 8.53% for the Russell Global ex-U.S. Small Cap Index -- significantly better than the Russell 2000 Index (6.97%), the Russell Global ex-U.S. Large Cap Index (5.92%) and the Russell 1000 Index (5.26%).
  • In addition to its attractive long-term performance history, international small-cap has displayed lower volatility than the Russell 2000.
  • Perhaps more important for those seeking diversification, it’s also had a lower correlation to U.S. large caps than either international large-caps or U.S. small-caps.
  • That’s due in part to the tremendous variety of geographies represented. The international small cap index includes companies from 44 countries, which rarely occupy the same position in their respective economic cycles at the same time.
  • Also helping is the prevalence of dividend-paying companies abroad. Approximately 84% of the companies in the Russell Global ex-U.S. Small Cap paid dividends as of the end of June.
  • Given that this is an exceptionally multifaceted asset class—and because many international small-cap companies are not followed by analysts—it can provide fertile ground for active managers to locate potential pricing inefficiencies.

 


1 Source for all data is Royce & Associates and Factset, for the period 7/31/1996 – 6/30/2017.

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IMPORTANT INFORMATION: All investments involve risk, including loss of principal. Past performance is no guarantee of future results. An investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls. International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.

The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, guarantee of future results, recommendations or advice.  Statements made in this material are not intended as buy or sell recommendations of any securities. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not  take into account the particular investment objectives, financial situation or needs of individual investors.

Diversification does not guarantee a profit or protect against loss.

Outperformance does not imply positive results.

Active management does not ensure gains or protect against market declines.

Investments in small-cap and mid-cap companies involve a higher degree of risk and volatility than investments in larger, more established companies.

Yields and dividends represent past performance and there is no guarantee they will continue to be paid.