NEW YORK (TheStreet) -- The market's minnows have outperformed its whales so far in 2015.
Steve Lipper, portfolio manager for the Royce Funds, said small-cap stocks could continue to beat their larger counterparts, even if interest rates finally turn higher.
"You tend to have more international exposure in the multinationals than you do in the small-cap arena and that's favorable," said Lipper. "Some of the smaller healthcare and biotech names have benefitted from acquisition. And you have more energy in the large cap-area so all-in-all you have a much more favorable environment."
The small-cap Russell 2000 Index has returned over 4.7% so far in 2015, far outperforming the mega-cap S&P 500's year-to-date gain of 1.7%.
As for the best small-cap sectors so far in 2015, Lipper said that companies that are not earning money - like many biotechs - are having the best performances year-to-date. He added that investors should be increasingly wary of such over-achievers.
"We think you want to tilt the other way toward economic sensitivity," said Lipper. "From the company managements that we talk to, we think we are going to see an economic acceleration from the pace in the first half, and so whether that's consumer discretionary or industrial companies, we think they are well-placed to do well."
Larger companies with bigger balance sheets traditionally have been better able to withstand the problem of higher interest rates than smaller ones. Nevertheless, Lipper said higher yields will not mean the end of the small-cap rally.
"Within small-caps you have companies that generate excess free cash flow and have the opportunity to reinvest that in their business, or to acquire a competitor, raise the dividend or buy back shares," said Lipper. "Rising rates brings the balance sheet back into the discussion so lean to the companies with better balance sheets."