Micro Cap – Q2 2022 Commentary
The Russell Microcap® Index declined 18.96% in the second quarter of 2022, with broad-based inflation and recession fears dominating equity investors’ thought processes. A flight to safety resulted in Utilities being the only Russell Microcap® sector with a positive return in the quarter (up 2.65%), as even the “safe haven” of Consumer Staples dropped 7.79%. Declines were broad-based in the quarter, with the index constituents of Communication Services, Materials, Consumer Discretionary, Health Care, and Information Technology all dropping more than 20%. The forward-looking nature of the equity market is clearly on display, as most companies outside of the portions of the Consumer Discretionary sector continue to experience solid demand patterns.
The KCM Micro Cap Composite returned -13.23% (gross of fees) and -13.39% (net of fees) in Q2, outperforming the Russell Microcap® Index by 573 basis points (gross) and 557 (net). The portfolio outperformed the benchmark in 8 out of 11 sectors, and sector allocation was also a positive contributor to performance in the quarter.
For the second quarter in a row, the best performing sector in the Micro Cap portfolio was Health Care. This was closely followed by Consumer Discretionary, and Consumer Staples. Offsets were modest underperformance in Financials, Utilities and Real Estate.
The market pullback provided us opportunities to invest in businesses undergoing a structural change at increasingly attractive prices. While we anticipate a slowdown in demand is likely to expand beyond the rather isolated pockets of the economy experiencing this today, we believe that companies with an ability to improve their cost structure or competitive position are likely to stand out vs. peers.
Thank you for your support, and please don’t hesitate to reach out with any questions or concerns.
|Christian McDonald, CFA®