Broker Check
Thinking Big with Small Cap

Thinking Big with Small Cap

June 11, 2020
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Loyal listeners to our weekly market update webinars will remember that we generally stick to four investment themes. Our Gatewood Wealth Solutions investment committee keeps a close eye the market and acts on these themes accordingly in our portfolios.

Earlier this month, we shifted our third theme from “Favor U.S. Large Cap” to “Favor U.S. Domestic Equity,” based on the GWS investment committee’s research.

1)   Inflation Risk is High

2)   Favor Equities over Fixed Income

3)   Favor U.S. Large Cap Favor U.S. Domestic Equity

4)   Bearish on Commodities, Real Estate and International

We continue to lower our overweight to U.S. Large Cap, specifically to our Technology weighting. We are using the proceeds to go down the market cap, meaning we have increased our Mid Cap and Small Cap exposure.­

Why the Change?

These changes are based on our Relative Strength ranking process. Most of the year has been spent “hiding out” in US Large Cap with the S&P 500 near the top of the table. Only Technology and Gold were above. We held both positions in the portfolio.

The S&P 500 is now in the bottom half of the table, with Mid Cap and Small cap taking the top seats. Gold is near the bottom.

Gold does well in market selloffs and inflation. It may take some time for the inflation to show up in the indices, and there appears to be a robust demand for homes. Potentially, this is a result of families’ desire for more space, considering how much time we spent in our homes during quarantine.

Technology is still doing better than the S&P 500, but it is slowing relative to other asset classes.

We continue to hold an overweight in Technology, but we have been using gains in the sector to add to more cyclical names.

What would cause us to reconsider our U.S. Domestic theme? A declining dollar. We are still in a trading range, but the dollar has lost value this past week. We continue to monitor, but a move to Small and Mid-Cap helps against this risk. If the dollar continues to decline, we would likely increase Emerging Market exposure at the expense of U.S. Large Cap.

A Deep Dive into Small Cap Growth

George Russell, CFA®, who manages the fund, was kind enough to join John Gatewood and me on our market update call last week. Listeners heard from George his economic outlook, approach to small cap management, and how his team executes trades within the portfolio. The highlights of his commentary are listed below, or you can listen to the full recap on our Gatewood Wealth Solutions YouTube channel. (Please not there is about a week delay in posting, due to mandatory compliance review.)

There’s a bumpy road ahead, but we’re likely already in recovery.

We’re officially in a recession now, and there’s a rough road to recovery. George clarified that, barring a second wave in the fall, we are likely now in a recovery period. We won’t be able to get back to the same levels of GDP we saw in 2019 until consumer confidence is restored through a vaccine, which could be late 2020 to early 2021. But it’s a start.

We’re already seeing a nice V-shaped recovery off the bottom. There will still be volatility in the market as we balance GDP and earnings. But, because the market discounts the future, we’re already looking toward 2021 when there will be significant improvement.

The Small Cap Growth Fund is fundamentally bottom-up.

George shared an inside look into his team’s small cap growth fund strategy. The fund is bottom-up, meaning it is completely rooted in research. Franklin Templeton is based in San Francisco, where it has a team of 30 industry experts whose jobs are to go out and talk to management teams and the companies in which they invest clients’ assets.

During those conversations, Franklin Templeton’s researchers of course discuss the economic situation. But they also recognize that to find an edge, they have to be able to identify great business models and management teams. Their role is to find companies that have strong tailwinds behind them, which allow them to grow significantly better than their peers in the market.

Another thing those research teams look for is long-term focus. Franklin Templeton takes a balanced approach to cyclical and secular exposure. They want a mix of companies that are dependent upon what economy is doing, but they also want have secular growth exposure to companies that should be able to generate good sales, cash flow, and earnings, almost regardless of market environment. No company is completely immune to economic fluctuations, but secular companies should do better than cyclical companies when the economy is weak.

While we are not permitted to publish performance data for the small-cap fund here, we encourage you to contact your advisor if you would like to discuss. For the entire recap of the webinar, visit our Gatewood Wealth Solutions YouTube channel. (Please note videos may take some time to post due to Compliance review.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. 

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

All investing involves risk including the possible loss of principal. No strategy assures success or protects against loss.

Dollar cost averaging involves continuous investment in securities regardless of fluctuation in price levels of such securities. An investor should consider their ability to continue purchasing through fluctuating price levels. Such a plan does not assure a profit and does not protect against loss in declining markets.

George Russell and Franklin Templeton are not affiliated with LPL Financial and Gatewood Wealth Solutions