Small cap stocks once again trailed larger capitalization market segments as the market finished the year at all-time highs. Amid improving credit conditions, low interest rate and inflation expectations and more convincing economic growth, investors tended to reward less profitable, more volatile and more richly valued companies within the small cap segment.
The Small Cap Core Fund had a return of 2.95%, trailing its benchmark, the Russell 2000® Index, which returned 3.34%. Stock selection was weak in a number of sectors, but most pronounced within the higher returning consumer discretionary and staples sectors, as well as the rebounding energy sector. More successful were the Fund's holdings in technology and financial industries that helped to reduce the impact of weaker results elsewhere. Within financials, stronger picks were evident among banks and mortgage REITs, both industries suffering negative absolute returns during the quarter. Sector selection, as intended, was not a meaningful contributor to returns.
Micro-caps (stocks of companies with less than $350 million capitalizations) lagged despite a generally supportive macro environment, but were only a modest negative contributor to relative returns. Stocks with low valuations underperformed stocks with high valuations (either P/E or P/B) while unprofitable stocks (no return on equity or reported earnings) fared well.
Going forward, we will continue to seek to provide diverse exposure to domestic small cap stocks, including those within the smallest segments of the market, avoid stocks of companies with low-quality characteristics and maintain a disciplined process to manage active risk and transaction cost.
Not FDIC insured | May lose value | No bank guarantee
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