Small-cap stocks, as represented by the Fund’s benchmark, the Russell 2000® Index, failed to keep up with larger-cap stocks (Russell 1000® Index) despite a very strong quarter for small-cap growth stocks. The lagging value side of the small caps held back returns more generally, as the energy, materials and staples sectors ended the quarter in negative territory. Valuation was a meaningful differentiator of returns, favoring growth across the capitalization spectrum. Regulatory and fiscal policy, as well as global political events, continued to move markets, spiking volatility more than once during the quarter.
The Small Cap Core Fund returned 2.62% versus the benchmark, Russell 2000® Index, of 2.46%. Sector selection was a modest, but positive contributor, mostly due to an underweight in the energy and financial sectors, both of which underperformed the broader small cap market. More significant to returns (as intended) was stock selection. Strong stock selection among energy stocks offset weaker picks in the consumer discretionary and industrials sectors. Generally strong stock selection among health care stocks counterbalanced the underweighted, but high returning, biotech stocks. Weaker stock selection was seen in consumer discretionary and industrials sectors, in which modest underweights (less than 15 basis points (0.15%) in a few stocks with very strong returns (over 25% for the quarter) resulted in negative contribution to overall sector returns.
In general, higher quality stocks (as defined by our stock selection model) outperformed, while the micro-cap portion of the market (stocks less than $350 million capitalizations) and to which the Fund has a long-term allocation, outperformed, helping push up returns. The market heavily rewarded stocks with higher valuations while deeper valuation stocks continued to fall behind in the year to date. However, the Fund’s neutral overall positioning resulted in modest contribution based on valuation differences while the bias to stocks with higher profit margins was a meaningful contributor to outperformance.
Going forward, we will continue to invest in a diverse portfolio of small-cap stocks in a cost-efficient manner. We will continue to seek exposure to micro-cap stocks while avoiding stocks with lower quality characteristics, as indicated by our proprietary quality model.
Not FDIC insured | May lose value | No bank guarantee
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