Last month was a good one for the markets: The S&P 500 eked out an 11% gain, and the Dow Jones Industrial Average finished the month with its highest monthly gain in 33 years. With the markets riding high, there are few areas of the market that are more suited to capitalize on investor optimism than the small-cap and midcap space, also known as SMID.
We spoke with Alex Ely, chief investment officer of U.S. Growth Equity at Macquarie Investment Management, about how his team has beat the Russell Midcap Growth Index (ticker: RMCCG), by more than 50% since the start of the year. Here are edited excerpts from that interview.
Your funds have had an impressive year. To what do you attribute this success?
We have been hyperfocused on one area of the equity markets that we believe is the most viable when it comes to creating value: U.S. small-cap and midcap growth. This year, many of the trends that we have invested in for years were accelerated by the pandemic: e-commerce instead of shopping, mobile banking instead of going to the bank, virtual health care instead of going to the doctor, to name a few. These trends will continue to grow, even after the pandemic ends next year.
What is your perspective on the SMID sector today and where it might go in 2021?
The SMID sector is a great place for investment because you can be early in identifying major demand trends, but also stretch to larger companies to own names with a leadership position. For 2021, it is a particularly good setup, as we believe we will experience dramatic gross domestic product growth in the next couple of years as we come out of the pandemic. Smaller companies are typically more levered to economic growth and that should help the sector.
How do you think the outcome of the presidential election and pandemic will impact the SMID market going forward?
Now that the election is over and a vaccine is coming to fruition, we should see a gradual acceleration of economic growth. These events create visibility, and risk assets like equities love visibility.
Visibility is when future events are better understood, thereby giving corporations and individuals the ability to make informed decisions. When the political climate becomes more settled, people have a better idea of what to expect from Washington over the next couple of years. As new treatments and vaccines are developed, we begin to understand better when the pandemic will end. In each case, it allows for people to plan for the future in different ways, to spend more for the eventual new reality. This new paradigm improves confidence, sentiment and, thus, economic activity.
How should financial advisors approach the sector when building client portfolios?
Equity markets typically offer the best returns over the long run. The longer the time horizon the investor has, the more they should be invested in equities. When investors look to build a portfolio, they should be looking for active managers with strong long-term results, and a team that has been together for a long time. SMID growth can make a lot of sense because of the opportunities it can provide. We believe that when investing, the biggest risk is not taking one.
What are some small-cap and midcap growth investment opportunities your team is liking for 2021? What do you like about them?
We believe the pandemic will end in 2021. As a result, we are looking at areas that are levered to that. Some examples include elective procedures. People have put off getting some things done this year, but they can’t put them off forever. We expect health care companies that are levered to procedure growth to benefit. Another area is interaction. It’s the No. 1 thing young people want to return to as the pandemic ends. Companies that are disruptive in this area will benefit. Whether it’s gyms or restaurants or events. We should see these businesses come back in a hurry.
We are very constructive on the market. Equities will continue to rise significantly in 2021 and 2022. Overall, companies that provide efficiencies and productivity gains will likely continue to benefit.
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Q&A: Macquarie Investment Management on Small-Cap and Midcap Investing originally appeared on usnews.com