essays pieces of the puzzle
Friday, January 11th, 2013
micro caps

13 0111 zIWC zPZI zFDM zWMCR

In June, I showed the performance of micro cap mutual funds, part of a series on the CFA Institute annual conference.

Here are their ETF cousins against the same index, the Wilshire Micro Cap, although the period of time shown is less because these all originated more recently.

The four shown come from a posting on ETF Trends.  The two that bracket the index in their returns are the two largest ones, FDM and IWC.  At just short of $500 million, IWC is more than ten times the size of FDM.  The other two are even smaller, and you can see that their performance has been much worse.

In contrast to the other two, which use a market cap weighting scheme and full replication of the index, PZI is equal weighted and WMCR uses an optimized strategy.  Given the challenges involved in indexing these tiny companies, care must be taken to look at the structures of the ETFs.  My guess is that for quite some time, that won’t matter.  The money is going to keep going to the ones with the numbers.

(By the way, of the mutual funds shown in the June chart, RYOTX and MMCFX significantly outperformed everything shown above for this time period, returning 38% and 40% respectively.)

The bottom panel of the chart shows how the index has done versus the S&P 500.  As you might imagine, when the market came under pressure, the smallest stocks got hammered and did worse than the big ones.  Then they rebounded more.  What’s particularly interesting, though, is how the relative performance has been going sideways for more than a year.  Which way will it break?  (Chart:  Bloomberg terminal.)

different speeds

By definition, having results that don’t look like everyone else’s results means not doing the same things everyone else is doing.  But investment organizations often breed conformity; one simple prescription is to actively look for people that operate at different speeds.