Small firms’ stocks deserve a closer look

Associated Press

WASHINGTON

Underperforming money managers are losing their most-reliable scapegoat.

Since the 2008 financial crisis, the nation’s professional stock-pickers — who manage billions for pension funds, endowments and wealthy families — have said stocks were too stuck-together to build smart, market-beating portfolios.

When stocks are rising and falling in unison based on the same big-picture economic news, with little regard for the companies behind them, it’s tough to beat the market.

That’s no longer a problem for the 2,000 small companies in the Russell 2000 index. Correlation among Russell 2000 stocks, as measured by data analysts at Credit Suisse, plunged to 20 percent in late January, from 74 percent in September.

The Russell has been on an upswing, gaining more than 36 percent in the past four months, compared with 22 percent for the much-bigger companies in the Standard & Poor’s 500 index.

Last month, the mighty Russell rose 7 percent — 60 percent better than the S&P 500, and its strongest January since 2006. The median market value of a Russell 2000 company is $563 million — about one-twentieth the median size of S&P 500 companies.

It should be a small-stock-picker’s paradise. Yet only 42 percent of the small-cap funds tracked by Credit Suisse are beating the market so far this year.