Federal Reserve policy and economic data were key drivers of performance among small-cap stocks. Interest-rate-sensitive sectors, which lagged through much of the quarter, dramatically rebounded after the Fed announced no change to its quantitative easing policy. However, expectations for continued-low interest rates propelled lower-quality stock performance ahead of higher-quality issues. Small-cap stocks generally outperformed larger-cap stocks in this rally. The strongly performing healthcare and technology sectors, the largest-weighted sectors in the Russell 2000 Growth® Index, dramatically outperformed the financials and utilities sectors, which have greater exposure in the Russell 2000® Value Index. Real estate investment trusts (REITs) underperformed substantially, which was a significant headwind for the Russell 2000® Value index, where REITs have a weighting of more than 12%.
The Small Cap Value Fund posted a total return of 7.73% for the quarter, compared with 7.59% for the Funds benchmark, the Russell 2000® Value Index. Stock selection was strongest in the financials, materials and technology sectors, led by holdings in the insurance, electronic equipment and chemicals industries. In contrast, stock selection was challenging in the consumer discretionary and healthcare sectors, where lower-quality stocks outperformed the better-rated stocks in our model. Stocks with lower return on equity and profit margins and higher debt-to-asset ratios outperformed their more robust peers.
We dont believe the recent success of lower-quality stocks suggests a permanent change to long-term patterns. We will continue to focus on the stocks of higher-quality, more-profitable companies within the small-cap value universe. Over the long term, we believe these companies will be better able to weather slower economic growth and more restrictive monetary policy.
If you're a more aggressive investor looking for the value potential offered by the stocks of smaller companies those the adviser believes are worth more than is indicated by current market prices this Fund may be right for you. It is intended for equity investors with an above-average tolerance for volatility who want to diversify their investments and plan to invest for the long term without concern for current income.
- Follow a quantitative, active equity strategy to select stocks based on a statistical analysis of historical relationships among value characteristics, stock prices and market capitalization ranges.
- Use a screening process designed to reduce exposure to stocks with negative fundamental indicators.
- Maintain a highly diversified portfolio, consistent with small-cap value benchmarks, in an effort to reduce the risks associated with any specific stock or industry.