Micro-Cap Stock Opportunities—Royce
article , video 02-18-2020

Micro-Cap Stocks: A Timely Opportunity

Francis Gannon details why he believes micro-cap stocks are poised to do well going forward.


So one of the more interesting aspects of the market in 2019 was this outperformance of mega-cap companies. And it really started in the middle of 2018. That’s where the divergence began, and, unfortunately, continues. It continued all the way through the end of last year, in 2019. And the difference between mega-caps, small-caps, and micro-caps were enormous.

Divergent Asset Class Performance
Russell Index Performance Spreads—6/30/18-12/31/19


Source: FactSet. 

It was about 30% between what the mega-cap stocks did and what micro-cap stocks did at the end of last year. Part of what we expect to happen is that mega-cap stocks should take a pause, and any type of pause would hopefully benefit the smaller end of the asset class spectrum.

We saw that in the rotation that took place over the summer in 2019. Micro-cap stocks did incredibly well between that August 27th date of 2019 and the end of December of last year. And we think that’s a trend that’s going to continue.

Strong Showing For Micro-Caps
Index Returns—8/27/19-12/31/19

strong showing microcaps

So you should see micro-cap companies doing better. You should see small-cap companies doing better, not just relative to large-cap companies, but relative specifically to some of these mega-cap companies that have done so well. So one of the, I think, unique aspects of our firm is that we’ve always been active in micro-cap stocks. They’ve always been a way for us to look at the broader market. It’s been an area that we’ve obviously been adding to over the past year, just giving the performance differential, and it’s an area that we will always continue to have exposure to in many of the larger portfolios.

I think micro-caps have a chance over the next five years to actually be an alpha generator for many active managers, especially within the small-cap space. So portfolios that have exposure to micro-caps should do better than the overall market, and you should see micro-cap companies, on a relative basis, catch up to the overall market.

More Small-Cap Perspectives


Important Disclosure Information

The thoughts and opinions expressed in the video are solely those of the persons speaking as of January 13, 2020 and may differ from those of other Royce investment professionals, or the firm as a whole. There can be no assurance with regard to future market movements.

The performance data and trends outlined in this presentation are presented for illustrative purposes only. Past performance is no guarantee of future results. Historical market trends are not necessarily indicative of future market movements.

Frank Russell Company (“Russell”) is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of Frank Russell Company. Neither Russell nor its licensors accept any liability for any errors or omissions in the Russell Indexes and / or Russell ratings or underlying data and no party may rely on any Russell Indexes and / or Russell ratings and / or underlying data contained in this communication. No further distribution of Russell Data is permitted without Russell’s express written consent. Russell does not promote, sponsor or endorse the content of this communication. All indexes referenced are unmanaged and capitalization-weighted. The Russell 2000 Index is an index of domestic small-cap stocks that measures the performance of the 2,000 smallest publicly traded U.S. companies in the Russell 3000 Index. The Russell 1000 Index is an unmanaged, capitalization-weighted index of domestic large-cap stocks. It measures the performance of the 1,000 largest publicly traded U.S. companies in the Russell 3000 Index. The Russell Microcap Index includes 1,000 of the smallest securities in the Russell 2000 Index, along with the next smallest eligible securities as determined by Russell. The Russell Top 50 Mega Cap Index is an unmanaged, capitalization-weighted index of domestic mega-cap stocks that measures the performance of the 50 largest publicly traded U.S. companies in the Russell 3000 index. Index returns include net reinvested dividends and/or interest income. The performance of an index does not represent exactly any particular investment, as you cannot invest directly in an index.

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