He says the last time small-caps outperformed for five consecutive years they went on to do so for another four, from the start of 1975 to the end of 1983. While this may be unique, he argues the run-ups to the two sets of extended outperformance are similar.“In the 1970s, before their run of outperformance, small-caps actually underperformed large-caps for five consecutive years. The same has been true of this latest run, where before the past four years, small-cap companies underperformed large-caps for five straight years.” As a result, he says, investors should not overlook the sector simply because the differential in performance between large-caps and small-caps has narrowed in the last year. Royce & Associates, based in New York, manages several small-cap portfolios for Legg Mason; in particular, the onshore US Smaller Companies fund. The fund, launched in April, has suffered in
performance terms: from April 4 to October 18, 2004, it registered a fall of 2.89% compared with an average fall of 1.74% for the IMA North American Smaller Companies sector, according to Standard & Poor’s. The fund, managed by Chuck Royce, invests both in small-cap companies and micro-cap companies, although the micro-cap element is limited to a maximum of 20% of the portfolio. Royce invests in some 100 stocks, although the top 50 holdings have generally represented about 70% of the fund’s net assets.