Small cap strength bodes well for active management

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While concerns about inflation, the Federal Reserve aggressively raising rates, and slow economic growth led the S&P 500 to post its worst first-half performance since 1970, small-cap funds didn’t fare so badly in the during the first half of 2022. According to Anu Ganti, senior director, index investment strategy at S&P Dow Jones Indices, the return of small caps could have positive implications for active managers.

“Mega caps were particularly hard hit, with the S&P 500 Top 50 posting a 22% loss, underperforming the S&P 500 by 2%,” Ganti wrote in the S&P Dow Jones Indices Indexology blog.

But this weakness among mega-caps was a tailwind for the S&P 500 Equal Weight Index due to its bias towards small-cap stocks, with the Equal Weight Index outperforming the S&P 500 by 3% up to present this year. Ganti noted that the Equal Weight Index’s underweight position in IT and communications services was a key factor in its outperformance.

The outperformance of small-cap, equal-weight companies could bode well for active managers, as their portfolios are often closer to equal-weight than capitalization. Plotting large-cap fund underperformance against equal-weighted relative performance against the S&P 500, as a proxy measure of small-cap outperformance, Ganti wrote that two of the three years most active managers large-cap outperformed (2005, 2007, and 2009) coincided with outperformance at equal weight.

This analysis syncs with recent observations from Morningstar ratings manager Jeffrey Ptak, who wrote on Twitter that active US small cap equity funds outperformed large caps in the first half of 2022.

“The relative performance of active small cap managers in the first half of the year is impressive given the volatility of the market. Managers were able to find hidden gems and demonstrate added value in a challenging environment,” said Todd Rosenbluth, Head of Research at VettaFi.

With inflation at its highest level in four decades and rising interest rates, markets are expected to remain volatile. In such a volatile market, passive ETFs may not offer downside protection. Nor do they offer investors a way to seek above-average returns.

T. Rowe Price offers a suite of actively managed ETFs. T. Rowe Price has been in the investment industry for over 80 years conducting hands-on research with companies, utilizing risk management and employing a multitude of experienced portfolio managers averaging 22 years of experience .

For more news, insights and strategies, visit our Active ETF channel.



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