U.S. small-cap funds went into full retreat mode in October, as investors began to brace for a market downturn.
According to Morningstar, small-cap value funds were down -2.06% over last month, and small-cap growth stocks fared worse, down 5.20% over the same time period.
Meanwhile, the iShares Russell 2000 Index Value ETF (IWN) slid to $118.00 per share last week, down from $123 per share at the beginning of October. Additionally, the iShares Russell 2000 Growth ETF (IWO) fell from $148 to $140, over the same time period.
As a result, money managers are picking up the pace in moving client cash away from small caps, even after many remained bullish on the sector only weeks ago.
On October 11, Fred Alger Management issued a survey of 200 financial advisors that concluded 76% were still "bullish" on small cash, even after a long period of underperformance.
"Advisors' optimism on U.S. small-cap equities comes at an interesting time, as these stocks underperformed U.S. large-cap equities by 15 percentage points over the past three years (as of 8/31/16), based on Russell indices," the report states. "Additionally, small-cap equities saw $14.7 billion of outflows over the past three years, compared with $122.3 billion flowing into U.S. large-cap stocks at the end of August 2016, according to Morningstar mutual fund and exchange traded fund data."
"Bullish sentiment from advisors toward U.S. small-cap stocks shows that they are confident in a performance reversal, thanks to both the undervaluation of the asset class and an improving U.S. economy," says Dan Chung, CEO at Alger. "With the understanding that such financial advisors are overwhelmingly optimistic on these equities, it will be interesting to see if their sentiment will translate into positive flows and greater valuations."