William Blair: Small-Cap Value Has Been Outperforming For 18 Months

During this presentation, the team at William Blair discuss why small-cap value has been outperforming for 18 months. Here’s an excerpt from the presentation:

Value’s been outperforming, at least in the small-cap arena, for the better part of eighteen months. Before that, we had a really long pronounced period of growth outperformance. Actually, a record high, really if you look at the trailing 10 years going back to conditions that really existed during the tech bubble.

I think really there’s two reasons for that. One, as we came out of the housing, the financial crisis in ’08 and ’09, we had fairly muted, below potential economic growth.

And so, growth was very scarce. Any cyclical stocks really didn’t have much of a tailwind, and therefore I think people did gravitate more towards growth.

And I think probably the second and most important reason is that we had a very prolonged period of zero or near-zero interest rates. Certainly, real rates on inflation-adjusted were in many cases negative.

That creates a lot of cheap money. Investors are willing to invest in companies where profits were very far in the future. I guess what they call now long-duration equities.

So I think it’s really those two things that set up a period of outperformance. But I think if you look back historically, these value/growth cycles can be somewhat long. I’ve really probably been in my career through three of them at this point. So, I think the value cycle does have some room to go.

I think small-cap value stocks are very attractively valued right now.

If you look at the small-cap value benchmark, it trades at around 13 times this year’s estimates, which is a fairly significant discount to small-cap value’s longer-term average, and even more so to large-cap stocks and small-cap growth stocks in particular. We’re trying to find stocks where that’s already discounted the valuation.

You can watch the entire presentation here: