Many highly regarded small-cap funds have put up "no vacancy" signs to new investors, writes Sarah Max in Barron's, their managers cautious among perky valuations or unwieldy AUM, or both. Notable closures include the $1.6B Artisan Small Cap Investor Fund, the $6.2B Fidelity Small Cap Discovery Fund, and the $993M Hotchkis & Wiley Small Cap Value Fund. T. Rowe Price has also closed two of its top performers, the $10.4B T. Rowe Price Small-Cap Fund and the $16B T. Rowe Price New Horizons Fund.
Caution may be in order given the big run for small-caps, but fund manager Bill Grierson says the current Russell 2000 (IWM +1.1%) P/E ratio is just slightly higher than its 10-year average of about 17x. Further, Q2 sales growth is at about 9% so far.
Another manager allows it's not an easy time to find cheap stocks, but beyond the sexy segments there's a whole universe of small companies, and he's been picking up some names.
Hammering away at the misconception that it pays to seek active managers in supposedly "less efficient" sectors like small caps, S&P Dow Jones' Philip Murphy finds - even choosing among the top mutual fund share classes - an alarmingly small number of managers failed to beat the benchmarks.
Starting at the March 2009 bottom and going out five years, only 9 of 139 share classes beat the S&P SmallCap 600 benchmark (that's 5.9% of the starting set).
Where alpha might be able to be delivered though, is in choosing which benchmark to track. A fund tracking the S&P SmallCap 600 (IJR, VIOO) would have outperformed one tracking the Russell 2000 (NYSEARCA:IWM) by 23% over the 5-year period.
"Knowingly overpaying never has made sense to me, which I think people are doing," says small-cap fund manager Eric Cinnamond, notable for being up 14.5% at the midway point in 2009 vs. peers' average loss of 27%, but missing out on the bull market of the last three years thanks to his large cash holdings.
The small cap stocks on his radar are as "expensive as I have ever seen them," he tells the WSJ. "We're just unwilling to overpay with other people's mooney in high-quality, small-cap stocks."
Chicago-based Good Harbor Financial is among the largest ETF portfolio managers and the company in May began to rebalance its $11B U.S. Tactical Core Strategy twice a month instead of once - today marks the first mid-month trade for the portfolio, reports the WSJ.
Good Harbor's main strategy today, says the Journal, looked to be selling small caps as well as two ETFs tied to the S&P 500 (SPY -0.7%), and volume spiked in the iShares Russell 2000 ETF (IWM -1.6%), the ProShares Ultra Russell 2000 (UWM -3%), the iShares Core S&P 500 ETF (IVV -0.7%) and the ProShares Ultra S&P 500 (SSO -1.5%).
Good Harbors was the largest single holder of three of those funds as of the end of March, and the 2nd largest holder of the fourth.
As it sold the equity ETFs, Good Harbors appeared to be buying two mid-to-long-dated Treasury bond ETFs, the iShares 7-10 Year Treasury Bond Fund (IEF +0.3%) and the ProShares Ultra 7-10 Year Treasury ETF (UST +0.7%), with both having volumes many multiples higher than normal.
Good Harbors was also a seller of small caps and a buyer of Treasurys in early May, says the Journal, which earlier this year reported traders growing accustomed to waiting for the firm's monthly rebalance.
Making the rounds across trading desks is this chart showing the Russell 2000 (IWM -1%) this week closing below its 200-day moving average for the first time since November 2012.
BAML's Macneil Curry adds a couple of additional technical ideas, noting Tuesdays this year have typically been positive, but not this week, and the Russell 2000 looks to be completing a 4-month head-and-shoulders top.
The small cap index is now off 5.3% YTD vs. a 1.6% gain for the S&P 500. It's also now fallen below the S&P on a Y/Y basis, up 13.3% vs. the big cap's 14.9% gain.