Small-Cap Value Stocks May Be Worth the Wait

According to a recent article in Barron’s, “academics have found that small-value stocks beat more popular growth ones if you can wait out the fallow periods.”

“One of the most important qualities of being a value investor is patience,” the article asserts, adding that this has been especially true in recent years for “much-ignored small-cap value stocks.” It cites comments from Jeff John, senior manager of the American Century Small Cap Value Fund: “Quality has been the hallmark of how we invest. We believe that quality over long periods of time will generate excess returns with lower volatility of returns.” He argues that, since the 2008 financial crisis, investors have avoided weak companies. Particularly with smaller businesses, he says, an adverse event can often translate into “permanent destruction of capital. So strong balance sheets are incredibly important.”

The article reports that, as of September 30th, financial services stocks were the fund’s largest sector at 38% of the portfolio. According to John’s co-manager Miles Lewis, “Bank stocks are pricing in a recession today. If a recession doesn’t happen—or if it happens and it’s not as bad as what’s being priced in, which we would argue is the case—then there’s a significant amount of upside over three to five years.”