Fundametrics® Smid Cap Equity
Q4 2022 Performance Summary and Observations
- The Fundametrics® Smid Cap Value strategy finished the year with strong relative returns, leading the Russell 2500 Value Index’s return by 102 bps for the quarter and 312 bps for the year.
- 2022 saw the Fed raise interest rates at one of the fastest clips on record, increasing the probability of pushing the US economy into a recession. Investors spent the year pricing in this risk, with small valuation multiples contracting by 29%, while trying to predict the Fed’s next move. 2023 will start with a lot of the same uncertainties, which historically creates alpha opportunities for disciplined stock pickers like CornerCap.
- The Fundametrics investment process, which emphasizes picking the best stocks within each peer group, performed well. The Alpha Composite Buys beat both the overall Smid-cap universe and sell-rated stocks. The Financial Warnings Overlay model that helps the portfolio avoid torpedo stocks was effective showing riskier companies.
- From a factor perspective, value, after being left for dead in previous years, continued its outperformance over long-duration growth. Investors also preferred high quality and dividend paying stocks.
- At two standard deviations below the average, small-cap P/E multiples suggest investors are pricing in significant recession risk. Since 2006, median one-year returns for the small-cap investable universe and Russell 2000 Value Index have been over 50% following these events without experiencing a down year.
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