Article: Active U.S. Small Cap Value Managers Outperform in Q2

Brendan Cooper | July 28, 2022

Q2 2022 Manager Research: U.S. Equity Performance Trends

Investment Metrics’ Q2 2022 Manager Research found that active U.S. small cap value managers outperformed in June, for the quarter and year-to-date time periods, marking the strongest year to date relative performance among all active style peer groups. Rising interest rates and spiking inflation have continued to drive the stock market sell off. As noted last July, we would expect value to outperform growth in this environment (see article Rising Rates Lift Value Over Growth – but Only If They Rise Fast Enough). The market volatility however, has given high conviction active managers an opportunity to demonstrate their stock picking skills.

In this report, we spotlight active U.S. equity manager’s performance as of June 30th 2022 based off the 10th business day preliminary data of IM Peer Groups.  For U.S. small cap value equity there were 138 products from 102 asset managers that we used for this analysis.

Summary of Active U.S. Equity Manager Performance:

  • Active U.S. small cap value managers have added the most value vs. their benchmarks in June, for the second quarter, year to date and trailing 12 months.
  • Year to date, large and small cap value managers are both adding value.
  • U.S. small cap growth still has strongest three-year performance with 80% of the small cap value products outperforming the benchmark during this quarter. In comparison, 55% of small cap growth products underperformed the Russell 2000 Growth index.
  • Concentrated, fundamental, high active share products led characteristics for top quartile performers.
  • Products which incorporated quality factors along with value accounted for half of the top quartile performers during the quarter.

Active U.S. Equity Median Performance by Style & Capitalization:

Figure 1: U.S. Equity Median Excess Return by Style.

The median active U.S. small cap value product added 77 basis points over the Russell 2000 Value index for the month of June, and nearly 2% for the quarter. In fact, 80% of the small cap value products outperformed the benchmark during the quarter. In comparison, the majority of small cap growth products (55%) underperformed the Russell 2000 Growth index. There were similar trends with international products. International small cap value managers delivered the strongest alpha in June and for the quarter, in which the median outperformed their benchmark by 2%.

Fundamental, high active share products (figure 2) made up the vast majority of the top quartile performers for the peer group during the quarter. On average, those products contained 45 holdings. Interestingly, similar to our findings in the recent monthly factor report – Report | Q2 2022 Factor Performance Analysis – products which focused on value factors such as price to earnings and cash flow yield were top performers. Half of the top quartile also incorporates quality factors into their investment process. Return on equity and earnings growth stability were two quality factors that drove their performance.

Figure 2: U.S. Small Cap Value Top Quartile Characteristics Q2 2022.

About Manager Research

The Manager Research is a comprehensive, easy-to-use analytical tool for evaluating asset managers and analyzing investment performance. It simplifies investment research and analysis with instant access to a powerhouse of decision-support information on institutional and retail investments.

The material presented in this document is an assessment of the market environment as of the date indicated; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any funds or any issuer or security or similar. This document contains general information only, does not consider an individual’s financial circumstances and should not be relied upon for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should always be given to consult a Financial Advisor before making an investment decision. Investment Metrics does not provide investment advice and nothing in this document should be considered any form of advice. Investment Metrics accepts no liability whatsoever for any information provided or inferred in this document.

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