Practical Applications of Small-Cap Allocations: Timing the Entry

In Small-Cap Allocations: Timing the Entry, in the September 2020 edition of The Journal of Portfolio Management, Eric Sorensen and Sebastian Lancetti, both of PanAgora Asset Management, assert that economic conditions now may favor a small-stock premium. They analyze the performance of small-cap stocks since 1965 and identify connections between small-cap stocks and moves in interest rates, market volatility, and the broader economy. They speculate that although large-cap stocks have outperformed small-caps during the past decade, conditions are ripe for small-caps to reassert themselves. The key factors include: 1) the very low level of long-term interest rates and the potential for interest rates to rise; 2) the anticipated economic recovery following the Covid-induced recession; and 3) the current relatively cheap valuations of small-cap stocks. TOPICS: Portfolio theory, portfolio construction, wealth management