Magnificent…Small Caps? Why Now and Why Confluence (April 2024)

A Report from the Value Equities Investment Committee | PDF

Why Small Caps?

Small capitalization stocks have spent the better part of 10 years in the shadows of their larger cap brethren but now currently provide an attractive opportunity, in our estimation. The divergence has been driven primarily by the narrow focus on a select few mega-cap technology-oriented businesses. This has led the Russell 2000 Index to trade at two standard deviations below its average relative to the Russell 1000 Index (see Figure 1), which was last reached during the Savings and Loan (S&L) Crisis of the late 1980s/early 1990s.

(Source: Kailash Capital)

Additionally, the divergence has placed the relative valuation of the Russell 2000 at levels last witnessed toward the end of the dot-com boom of the late 1990s/early 2000s. This has some investors questioning the vitality of small caps. However, we view the relative underperformance as cyclical, driven by the prolonged accommodative monetary policy that followed the Great Financial Crisis of 2008-2009, which seems to have encouraged a more aggressive allocation of capital toward tech and unprofitable small caps.

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Back to the Future: The Advantages of Dividend Income Over Interest Income (February 2024)

Insights from the Value Equities Investment Committee | PDF

Over the past 15 years, dividend income has often exceeded what could be earned in a money market account. But as seen in the chart below, with the fed funds rate now at 5.5%, the relationship between dividend income and interest income has gone back to what was common before 2008 — where the S&P 500 dividend yield (the blue line) is 2-3% below what could be earned in a money market account invested in U.S. Treasury bills (the red line).

This begs the question:

Why should an income-oriented client still invest in a dividend income-focused stock portfolio yielding 3% when they can now earn 5% in a low-risk money market account?


Higher inflation is causing interest rates to rise on short-term fixed income and money market instruments, and now investors have more choices in generating income returns. While current yields are appealing, we believe it would be short-sighted for long-term investors to abandon the compounding benefits of a growing income stream that can protect purchasing power while also providing for growth of principal.

In this Value Equity Insights report, we highlight some of the potential advantages of growing dividend income through a portfolio of quality, growing businesses — factors which might be underappreciated in the current environment.

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Is It Different This Time? (December 2023)

A Report from the Value Equities Investment Committee | PDF

For the better part of the past seven years, the broad indexes have been driven by the strength of a handful of mega-cap technology-oriented businesses, namely: Alphabet, Amazon, Apple, Meta, Microsoft, NVIDIA, and Tesla. The narrow focus is beginning to cause some investors to question if there has been a permanent shift in the investment environment, a shift that is so noticeably different from the past that we need to discard the traditional rules of investing and conclude that “this time is different.” That last phrase is credited to Sir John Templeton, investor and philanthropist, who often stated that those are the four most dangerous words for investors. Heeding Sir John’s advice, one should be wary of assuming that current market conditions and trends will persist indefinitely. The failure to recognize underlying similarities to past events may lead to irrational expectations and imprudent investment decisions. This Value Equity Insights report strives to offer some perspective on the bifurcation that has occurred in the current market and provide some historical context in order to help investors navigate the investment landscape more safely.


The market cap-weighted indexes, such as the S&P 500, have been heavily influenced of late by the mega-cap names, and more specifically, the seven technology-oriented businesses mentioned earlier which have been referred to in the media as the Magnificent Seven (M7) due to their recent stellar returns. While the M7 businesses have benefited from a handful of trends centered around a more connected, intelligent, and mobile society (not to mention the COVID lockdowns), their relative stock performance has created a bifurcated and very concentrated market, one that has parallels to many of the past periods of excessive exuberance.

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