Small-cap stocks made a comeback in the final weeks of the quarter, partially reversing their underperformance versus larger stocks this year, as did value versus growth in the small-cap universe. However, higher quality failed to be rewarded, as less profitable, higher risk stocks, proved more popular among investors.
The Small Cap Value Fund kept pace with its benchmark, the Russell 2000® Value Index, returning 5.10% versus the Index return of 5.11% for the quarter. The rally late in the quarter helped tilt the market in favor of small caps and value, offsetting some of the struggle these market segments had through much of the year. Within the Fund, stock selection within sectors was mixed. Within those sectors with the weakest stock selection (health care, consumer discretionary and real estate) underweighted, low quality stocks, were the outperformers, while stronger results for the Fund were found in those sectors with a more typical pattern of higher quality outperformance (technology and financials). Sector weight differences, while modest, were a positive contributor to outperformance.
After several quarters of growth stock dominance, value made a comeback at the end of the third quarter, which led to mixed performance results based on valuation characteristics. High and low price-to-book valuations were better performers, while price-to-earnings results were very closely matched along the valuation spectrum. More consistent was the outperformance of low profitability characteristics, as were low profit margins. Also evident was the market rewarding stocks with high volatility in the small cap-value space, as risk aversion took a breather in the late quarter rally.
Going forward, we will continue to apply our disciplined cost- and risk-efficient investment strategy, focusing on reasonably priced, profitable small company stocks while seeking to avoid stocks with low quality characteristics.
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