Advisors increasing allocations as small-caps rally

investmentnews.com:

For the first time in a long time, financial advisors are thinking small.

The Russell 2000 is finally narrowing the gap against its big-cap brethren after more than a year of severe underperformance. The small-cap index is up 17.7 percent and 21.1 percent, respectively, over the past 6 and 12 months, compared to the S&P’s return of 21.3 and 33.2 percent over the same periods.

The narrowing delta between the two indexes in the last year has a number of wealth managers thinking a change of leadership may be at hand, and as a result they’re shifting more funds from the market’s whales to its minnows.

Greg Tuorto, portfolio manager of the Goldman Sachs Small Cap Core Equity ETF (GSC), believes the entire market is on the cusp of an earnings recovery, but said it will be felt most powerfully in the small-cap space.

“Earnings had a downturn in small-caps going back to 2021, when the interest rate cycle changed. And we’re starting to see an emerging consensus from the companies. Earnings are a bit better, especially for the heavily domestically focused companies like the ones we invest in,” he said. 

As for those Federal Reserve rate cuts that are supposed to benefit small companies more than larger ones, Tuorto says it’s not catastrophic for his portfolio should the Fed easing continue to be delayed by higher-than-expected inflation numbers.

“As long as rates don’t go much higher, then small-caps can outperform,” he said. “The companies themselves have adjusted quite well to a higher interest-rate environment. They found other ways to raise capital like convertible bonds, which is an area that they like a lot. And we do think that they’ve adjusted to the investment cadence that they need to have in a higher-rate environment.”