Small Cap Select – Q3 2018 Commentary
The Market In General
The U.S. equity markets were up in the third quarter. However, unlike the second quarter, large-cap stocks beat their small-cap brethren rather handily. The small-cap stock indexes were down in the month of September while the large-caps continued their upward trend.
While we do not want to get too caught up in the macro, geo-political side of the market, there are an inordinate number of issues out there. Many have to do with trade disputes. It appears the Mexico/Canada dispute has been resolved. We would like to see the others resolved in a timely, sensible fashion also. In our opinion, that would be good for the market.
It is our belief that rising interest rates are also an issue for the market. We have discussed how this affects equity markets and equity valuations in previous letters. Therefore, we will not belabor the issue here. We will only say that the slow march of rising interest rates will likely temper the torrid equity gains of the past few years.
Having said all that, we will just stick to what we do. We strive to find stocks that are cheap on a relative basis and have a catalyst to go up meaningfully over the next few years.
The Select composite was up 5.40% (gross of fees) and 5.17% (net of fees) for the third quarter while the Russell 2000® benchmark index was up 3.58%. Year-to-date, the Select composite was up 12.20% (gross of fees) and 11.45% (net of fees) while the Russell 2000® benchmark index was up 11.51%. As always, the results of individual accounts may vary due to cash additions and withdrawals that have occurred over time.
Our largest sector contributor to performance on an absolute and relative basis was Health Care. We had several holdings that contributed meaningfully in the sector. In fact, six of our top ten best absolute contributors were in Health Care. The Industrial sector was also a big contributor to performance in the quarter. We also did well in the Energy sector, however, this is a sector we have struggled in for many quarters. We are now striving to own relatively low risk stocks in this very high-risk sector.
Our worst sector performance was in the Financial sector. Our banks, as a whole, underperformed the banking industry group also. We simply need to do more work in this group. We also underperformed within the Consumer Staples and Information Technology sectors.
Individual stock volatility has increased recently. Any type of negative news can mean a stock gets crushed. Any positive news, or anticipation of positive news, can drive a stock meaningfully higher. We took advantage of some of this action during the quarter. We will do our best to capitalize on any of these opportunities as they present themselves. We think this volatility is here to stay for a while. Yes, at times it hurts! But it is also very good when you can take advantage of it.
Thank you for your continued confidence in us. Should you have any questions or concerns, never hesitate to call.
Terrence G. Raterman, CPA, CFA®