Hi Rob,
Small caps have outperformed historically, however much of the strong performance is attributed to late market cycle rallies. As interest rates have risen, the relative value of long duration assets, i.e. companies with low near term earnings in growth phases, tend to see significant discounting given the relative value of lower risk assets. Asset managers have also been shifting allocations to assets with more liquidity in order to reduce the embedded risk within portfolios, further adding to the selling pressure seen in the small cap space.
- In simple terms, small caps need more money to grow, and money is now more expensive and harder to get. Large caps generally self fund growth or have more access to cheaper capital.
We are currently running with a higher cash balance in the Emerging Companies Portfolio, in part because we expect this trend to continue, however, significant value has returned to the space and the flow of money has started to shift as evidenced by an increase in M&A activity in recent months. The worm will turn, and there will be money made in this space again!