Small-cap equities are in the midst of a revival, leading U.S. public pension funds to take a closer look at their active managers that have not kept up with benchmark performance, industry experts say.
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Nedelina (Nina) Petkova, principal and head of marketable equity research at NEPC, said despite the Russell 2000 index’s double-digit gains, lower quality, higher beta and momentum-oriented stocks drove that strong performance.
“On the active manager side, there’s always a preference for quality, profitability, and downside risk discipline, so I think that’s really important as a backdrop,” said Petkova.
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“I think when we look back through history, quality often trails large market rallies. We saw something similar back in 2021 and it often comes back in favor shortly thereafter,” Petkova said.
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“Many of the stocks that are responsible for the majority of these returns have been a specific subset, and many of these names, in particular, have since exited the small-cap index with the latest June reconstitution,” Petkova said.
Going forward, the more frequent reconstitutions will impact the dynamics of the small-cap universe, and Petkova said she sees this as a positive.
“The problem was that rising volatility and an increase in the (rapidity) of winners and losers have led to index style drift, and the move to reconstitutions twice per year should level the playing fields and should help indices stay more aligned with their intended exposures,” Petkova said.
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