Small caps

In client conversations’ today we referenced some recent trades to lift our small cap exposure (from essentially zero).

The basic idea is that smalls are on a similar enough multiple to large cap (normally there is a wider spread)…

…with smalls expected to grow (on the assumption we have a soft landing!) by vastly more than the large cap market, smalls here have a CAGR that is closer to 20%.

Smalls (similar story to EM, really) got hit hard by higher rates, higher inflation, flight to quality, decreased risk aversion, and more.

If we get a “muddle through” smalls should do well. If we get a downturn, they will sink like weak tea. Hence our positions are not large, relative to our SAA (actually still slightly underweight, but well up from near zero).

If we get a recession, most risky assets will suffer, and we’d simply deploy (hopefully) outperforming defensives into cheaper units.

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