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The small-cap surprise

Globally, small caps have almost universally outperformed since the start of the Covid-19 crash. In South Africa, however, the experience has been mixed.
Even including the crash, small caps have run ahead of large caps in almost every market. Image: Moneyweb

One of the least-discussed features of global markets over the past year has been the relative outperformance of small caps.

So much attention has been placed on the performance of the mega-cap growth stocks, that it has almost gone unnoticed that small caps have almost universally fared better than large caps since the global pandemic hit.

Taking February 21, 2020 as the day before the start of the market crash, the following chart compares the performance of small-cap indices to their large-cap counterparts around the world from that point until the end of February 2021.

Source: Morningstar & Citywire

Of the major markets covered, it is only in Japan that large caps have outperformed over this period. In more than half of the remainder, the scale of relative small-cap outperformance has been in double digits.

This is even true in the US market that has been so dominated by the big tech stocks. In both US value and US growth, small caps have fared substantially better.

The biggest divergence has been in the UK.

It is worth noting the scale of the small-cap outperformance would be even more pronounced if the starting point was taken as the market bottom on March 23. Even including the crash, however, small caps have run ahead of large caps in almost every market.

This is therefore not just about recent gains due to the vaccine rally. As the graph below shows, if one looks only at the period from November 1, 2020 to the end of last month, the scale of outperformance by small caps doesn’t change that much.

Source: Morningstar & Citywire

In fact, for the World-ex US, the relative outperformance of small caps in just the vaccine rally has been smaller than it was over the full period from before the Covid-19 crash. The same is true for Asia Pacific, Europe, the UK and emerging markets.

What has happened on the JSE?

In this respect, South Africa’s experience has been far more similar to the US than its emerging market peers.

On the JSE, small caps heavily underperformed for most of 2020. However, they have rallied since the start of November. The FTSE/JSE Small Cap index is up over 35% in that period, which is slightly ahead of the 31% gain on the FTSE/JSE Top 40.

Mid caps, however, still lag meaningfully. The FTSE/JSE Mid Cap index has gained around 23% since the start of the vaccine rally.

Fund returns

This mixed experience is also reflected in the relative performance of small and mid-cap equity funds.

As the table below shows, the average return of funds in the Asisa South Africa equity mid/small-cap category was lower than that of general equity funds from February 21, 2020 to February 28, 2021. For the period from November 1 last year, however, small-cap funds are ahead.

South Africa small-cap fund relative performance
21 Feb 2020 to
28 Feb 2021
1 Nov 2020 to
28 Feb 2021
Asisa South Africa equity mid/small-cap 8.2% 26.7%
Asisa South Africa equity general 9.9% 23.6%
Small-cap out/underperformance -1.7% 3.1%

Source: Morningstar

Over the more recent period, all seven local small and mid-cap funds performed reasonably well. They returned between 19.8% and 33.4%.

When looking back to February last year, however, it is noticeable how mixed their performance has been.

The Coronation Smaller Companies fund stands out as the top performer, with a 22.7% gain over that period. Unsurprisingly, the Satrix Mid Cap Index fund is the laggard, with a return of -7.5%.

As the table below shows, however, even if one excludes the Satrix unit trust, the difference in returns between the top- and bottom-performing funds since the start of the Covid-19 crash is 22.2%.

That is a substantial difference over one year in such a small sector.

South Africa equity mid/small cap fund performance
21 Feb 2020 to
28 Feb 2021
1 Nov 2020 to
28 Feb 2021
Coronation Smaller Companies fund 22.7% 33.4%
Momentum Small Mid-Cap fund A 22.1% 28.4%
SIM Small Cap fund A 12.2% 31.9%
Nedgroup Inv Entrepreneur fund R 10.1% 19.8%
Old Mutual Mid & Small-Cap fund R 3.3% 22.6%
Momentum Mid and Small Cap Index fund A 2.1% 28.0%
Ninety One Emerging Companies fund R 0.5% 26.1%
Satrix Mid Cap Index fund A1 -7.5% 23.8%

Source: Morningstar

Patrick Cairns is South Africa Editor at Citywire, which provides insight and information for professional investors globally.

This article was first published on Citywire South Africa here, and republished with permission.

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Pension funds take note, this is called sector rotation in the speak of savvy investors on Bloomberg.

End of comments.

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