Who Are The Best Investment Managers for U.S. Small Caps?

As earnings season uncovers the creaks at U.S. large cap stocks, investors are now spending more time researching U.S. small cap investment managers. Given a back drop of rising rates and recessionary pressures, it seems like a contrarian view. But the investment managers they are looking at are doing things differently.

U.S. Small Caps And Recessions

Here are 4 examples of the types of U.S. Small Cap companies investment managers like today:

1. Small Cap companies that have managed to keep their balance sheets strong. In doing so, they have protected themselves from rising rates.

2. Small Caps that are not affected by a strong dollar that could hurt non-domestic demand for their goods and services.

3. Small Cap companies that are not affected by supply chain dislocations, or reliant upon maintaining large inventories.

4. And if you can find them, small cap companies which have pricing power with their customers. Which is what the fundamental based research asset managers are doing.

The attraction to U.S. Small Caps today is supported by valuation. Comparing Small to Large Caps, various multiples suggest the market is trading at lows not seen in almost 50 years.

With the Russell 2000 trading at it's most attractive discount to the Russell 1000 in more than 20 years, professional investors are considering looking beyond the cyclical characteristics of U.S. smalls caps. Even as rates are on the rise and a recession may lie ahead.

This contrarian tactical view revolves around the contention that fear is preventing most investors adding to Small Caps (as supported by the current extreme levels of the VIX index) and the belief that the spread between large and small caps will follow the historical mean reversion path.

Domestically focused U.S. small caps are arguably relatively cheap, and create optionality in the event of a new global risk-on rally.

Read all the latest insights from U.S. small cap investment managers inside RFPnetworks.