SOURCE: Russell Investments

Russell Investments

May 19, 2014 09:10 ET

Tables Turn: Ex-U.S. Small and Microcap Indexes Outperformed U.S. Counterparts in 2014 as of May 16, According to Russell Indexes; Institutions See Opportunity to Diversify Into Micro-Caps Outside the U.S.

SEATTLE, WA--(Marketwired - May 19, 2014) -  Small- and microcap stock indexes outside the U.S. outperformed their U.S. counterparts year-to-date as of May 16, reversing a one- and three-year performance trend as of year-end 2013.

Small Caps

  • In the small cap arena, the U.S. small-cap Russell 2000® Index returned 38.8% and 15.7% for one and three years (annualized) as of December 31, 2013. This compares to 17.7% and 4.7% for the Russell Global ex-US Small Cap Index for the same periods.

  • Tables have turned with 2014 year-to-date performance. As of May 16, the Russell Global ex-US Small Cap Index returned 2.4% YTD compared to (-4.8%) for the Russell 2000 Index.

Microcaps

  • In the microcap arena, the U.S. microcap Russell Microcap® Index returned 45.6% and 16.5% for one and three years (annualized) as of December 31, 2013. This compares to 17.8% and 3.1% for the Russell Global ex-U.S. Microcap Index for the same periods.

  • Tables have turned with 2014 year-to-date performance, with microcap leadership shifting to outside the U.S. As of May 16, the Russell Global ex-U.S. Microcap Index returned 3.2% YTD compared to (-6.7%) for the Russell Microcap Index.

"We believe we can find diversification benefits by extending our small- and micro-cap allocations outside the U.S.," said Michael Viteri, Senior Investment Officer for Public Equities at the Oregon State Treasury. "Global ex-U.S. microcap stocks tend to be less efficiently priced and under-researched by institutional investors, which can lead to investment opportunity and enhance overall diversification potential."

The Russell Global ex-US Microcap Index is a subcomponent of the Russell Global ex-US Small Cap Index that is comprised of the smallest small cap securities from both developed and emerging market countries. With the Russell Global Index as the parent index, stocks are organized relative to the rest of the world rather than relative to their county or region of origin, and the breaks between large and small cap (as well as the mid cap and micro cap subcomponents) are the same across all markets. 

"For investors looking to diversify their core equity portfolios, non-U.S. small and microcap stocks may offer diversification potential due to their historically low levels of correlation with the U.S.," said Russell senior index research analyst Mat Lystra. "And when measuring global markets, we believe the Russell Global Indexes provide a more accurate picture for investors because they are built using a bottom-up company level approach, as opposed to evaluating countries or regions in isolation. This results in size consistency across markets, meaning a $500 million stock is going to be classified as microcap regardless of what country it is from." 

You can find more information on the Russell Global Indexes on the Russell Indexes website.

Source: Russell Investments. Returns are total returns (reflect reinvestment of dividends and distributions) and are denominated in US dollars.

The Russell Global Index measures the performance of the global equity market based on all investable equity securities, and is constructed to provide a comprehensive and unbiased barometer for the global segment. The Index includes more than 10,000 securities in 47 countries, and covers 98% of the investable global market. All securities in the Russell Global Index are classified according to size, region, country and sector; as a result the index can be segmented into more than 300 distinct benchmarks.

Please note: Indexes are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment. Russell's publication of the Indexes or Index constituents in no way suggests or implies a representation or opinion by Russell as to the attractiveness of investing in a particular security. Inclusion of a security in an Index is not a promotion, sponsorship or endorsement of a security by Russell and Russell makes no representation, warranty or guarantee with respect to the performance of any security included in a Russell Index. 

Correlation is a statistical measure of how two markets, or collections of individual securities, move in relation to each other. Markets that move very closely to each other are considered to have a high correlation while markets that do not move very closely to each other are considered to have a low correlation.

Small capitalization (small cap) investments generally involve stocks of companies with a market capitalization based on the Russell 2000® Index. Small cap investments are subject to considerable price fluctuations and are more volatile than large company stocks. Investors should consider the additional risks involved in small cap investments.

Micro capitalization (micro cap) investments involve stocks of companies with smaller levels of market capitalization (generally less than $ 1 billion) than larger company stocks (large cap) or many small company stocks (small cap). Micro cap investments are subject to considerable price fluctuations and are more volatile than large or small company stocks. Investors should consider the additional risks involved in micro cap investments.

The Oregon Investment Council, which manages the approximately $66 billion Oregon Public Employees Retirement Fund (PERS), has recently added ex-U.S. micro-caps to its overall allocation, using the Russell Global ex-U.S. Microcap as a benchmark. Opinions expressed by Mr. Viteri and Mr. Lystra reflect market performance as of May 16, 2014 and are subject to change at any time based on market or other conditions without notice. Past performance does not guarantee future performance.

This material is not an offer, solicitation or recommendation to purchase any security. Nothing contained in this material is intended to constitute legal, tax, securities or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. The general information contained in this publication should not be acted upon without obtaining specific legal, tax and investment advice from a licensed professional. The information, analysis and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual entity.

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Russell Investment Group is a Washington, USA corporation, which operates through subsidiaries worldwide, including Russell Investments, and is a subsidiary of The Northwestern Mutual Life Insurance Company.