Fundametrics® Small Cap Equity

1Q 2023 Performance Summary and Observations

  • The Fundametrics® Small Cap Value strategy finished the quarter slightly better than the Russell 2000 Value Index.
  • Bank failures and tightening lending standards increased the probability of a recession in March. Bank stocks were losers while longer-duration growth stocks were winners as long-term interest rates fell. The low vs. high valuation spread dominated the month of March and the quarter. The Low valuation style was negatively impacted from an overweight to banks and high valuation benefited from an overweight to technology.
  • Success so far in 2023 has meant doing the opposite of 2022’s leadership. This is the first quarter in 2 years where the Alpha Composite sell rated stocks have beaten the buys. Although we were not surprised to see longer-duration stocks outperform at the start of 2023, the way events unfolded for banks did catch us off guard. The Bank Peer Group model’s balance sheet analysis has been more focused on credit quality of loans. Recent events have prompted us to develop new bank factors that incorporate fair value vs. carry value differences (CornerCap’s Bank Failure Report).
  • The market environment appears favorable for Small Cap Value stocks. If the Fed is not at peak rates, it would appear to be close. In addition, current 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 positive following these types of environments without experiencing a down year.

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