US small-caps undiscovered connection: Value-led periods and active management

Active US small-cap management has shown a strong relative long-term performance, often outperforming the Russell 2000 Index, especially during periods when value stocks lead. Research indicates that active small-cap managers excel in value-led markets due to their focus on equal-weighted portfolios and valuation skills, which align well with the broader participation characteristic of such markets. Historically, these managers have struggled during growth-led periods marked by narrow leadership and high-valuation stocks dominating indices.

As current market conditions suggest a potential shift from growth to value leadership, this historical trend could offer significant opportunities for active management outperformance. With expectations of small-cap returns aligning with conditions favoring value stocks over the next five years, investors may find renewed advantages in actively managed strategies focusing on undervalued sectors within the small-cap space. Such dynamics underscore both opportunities and risks associated with market cycles and investment strategy alignment as we potentially enter a period conducive to active management success in US small-caps.