September 28, 2018

Investors Turn Toward Small-Caps on Trade-War Concerns

by Tom Roseen.

With trade-war rhetoric between China and the U.S. ratcheting up and President Trump’s $250 billion in new China tariffs now in effect, some asset classes that had not been as impacted by global trade are gaining attention. For the Lipper fund-flows week ended September 26, 2018, small-cap funds (including ETFs) attracted some $2.6 billion net, witnessing inflows for an eighth consecutive week.

In contrast, overall equity funds witnessed net outflows for the third week in four, handing back $582 million for the most recent week. The pariah of the equity universe, large-cap funds (which are heavily influenced by multi-national firms) suffered net redemptions for the first week in three, handing back $1.8 billion this past week. Large-cap funds have experienced net redemptions for each of the last three years and are in net-redemption territory for this year to date (through the most recent fund-flows week), suffering net redemptions to the tune of $20.3 billion.

While small-cap funds suffered net redemptions for 2017 (-$2.6 billion), they witnessed net inflows for 2016 (+$13.8 billion). Investors have also padded small-cap funds’ coffers so far in 2018, injecting a net $27.7 billion. Some of this can be attributed to the small-cap premium investors expect from taking on more relative risk, but with large-cap indices hitting record highs and concerns growing about the impact a trade war can have on the global markets, investors appear to be expecting greater returns from small-cap firms that might not be as vulnerable to global trade issues.

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