By Philip van Doorn, MarketWatch
A rally in the dollar has capped gains for large-cap stocks, which have risen only about 1.6% this year, as measured by the S&P 500 Index /zigman2/quotes/210599714/realtime SPX +0.64% . And the problem is, the benchmark index of the 500 biggest publicly traded U.S. companies already is trading at its highest valuation since 2004.
Small-cap stocks, free from the burden of the strong U.S. currency, are outperforming. The Russell 2000 Growth Index /zigman2/quotes/210598133/delayed XX:RUO -0.04% , a benchmark for smaller companies, has jumped 8.3% this year. Investors have pushed up those valuations to an average of 35.6 times consensus 2015 earnings estimates, double that of the S&P 500, according to FactSet. The technology-heavy Nasdaq Composite Index /zigman2/quotes/210598365/realtime COMP +1.00% is up 5.3% and trades for 21.7 times forward earnings.
Here’s how the three indices have compared over the past three years:
The dollar’s rise
The rising value of the U.S. dollar against other world currencies has hit large-cap stocks especially hard, since big companies are far more likely to rely on sales outside the country than smaller companies do. That is not only because products are less competitively priced abroad. The translation of foreign currencies to dollars also hurts profits.
This is one of the main reasons why 318 of S&P 500 companies have seen their consensus 2015 earnings estimates fall this year.
This year’s best-performing small-cap funds
Here’s a list of the 10 actively managed small-cap mutual funds during 2015, through Monday’s close:
|Small-cap fund||Ticker||YTD total return|
|Jacob Small-Cap Growth - Investor||/zigman2/quotes/209915876/realtime JSCGX||20.6%|
|Jacob Micro-Cap Growth - Institutional||/zigman2/quotes/204466577/realtime JMIGX||15.2%|
|Oberweis Emerging Growth||/zigman2/quotes/209591051/realtime OBEGX||14.8%|
|Oberweis Small-Cap Opportunities||/zigman2/quotes/202047088/realtime OBSOX||13.9%|
|Hodges Small Intrinsic Value - Retail||/zigman2/quotes/201675688/realtime HDSVX||12.5%|
|Century Small-Cap Select - Institutional||/zigman2/quotes/209431326/realtime CSMCX||12.3%|
|Federated Kaufman Small-Cap A||/zigman2/quotes/204166501/realtime FKASX||12.0%|
|AlphaMark Small-Cap Growth||11.9%|
|Wells Fargo Advantage - Emerging Growth - Investor||11.6%|
|AllianzGI Micro-Cap - Institutional||11.6%|
This year’s strongest performer is the Jacob Small-Cap Growth Fund /zigman2/quotes/209915876/realtime JSCGX +3.92% , with a 20.6% return, followed by the Jacob Micro-Cap Growth Fund /zigman2/quotes/204466577/realtime JMIGX +3.41% , up 15.2%.
In an interview on Tuesday, Ryan Jacob, who co-manages both funds, said 2014 was a “difficult year” for active fund managers, the great majority of whom underperformed the S&P 500, which returned 13.7%. The Russell 2000 Growth Index, in contrast, returned only 4.6%.
“Last year was a bit unusual in that it wasn’t just that large-caps that outperformed, it was the largest large-caps,” Jacob said. Market indices are weighted by companies’ market capitalizations, so “for an active manager, it is very difficult to ‘out market-cap’ the indices,” he said.
This year’s underperformance for large-caps “shouldn’t be terribly surprising” in light of the dollar’s rise, Jacob said. The U.S. Dollar Index is sitting close to a lofty 11-year high.
If the U.S. economy slows, indicated by weak retail sales and slowing employment growth in the first quarter, Jacob sees the potential for small-cap stocks to continue to outperform “because that is when investors reach more toward secular growth, for companies that can perform well even in a subpar economic recovery,” he said.