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Small-Cap Allocations: Timing the Entry

Eric Sorensen and Sebastian Lancetti
The Journal of Portfolio Management September 2020, 46 (8) 51-63; DOI: https://doi.org/10.3905/jpm.2020.1.169
Eric Sorensen
is the chief executive officer at PanAgora Asset Management in Boston, MA
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Sebastian Lancetti
is a director and head of portfolio strategy at PanAgora Asset Management in Boston, MA
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Abstract

This article examines the behavior of the small-capitalization stock return cycle. The authors compare the period 1980–2020 with a study for the period 1960–1995. They find that in the earlier period small-cap stocks earned a return premium when the economy was rising, long-term rates were rising, the US dollar was rising, and market volatility was falling. During the last decade, a strong move in large-cap stocks dwarfed the small-cap premium. The authors conjecture that a change in the character of economic growth, rising long-term rates, and oversold small-cap conditions may reverse this.

TOPICS: Portfolio theory, portfolio construction, wealth management

Key Findings

  • • The small-cap premium appears to have waned in the last 20 years.

  • • The premium is, however, still related to economic cycles.

  • • Economic conditions and valuations now favor a small-stock premium.

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The Journal of Portfolio Management: 46 (8)
The Journal of Portfolio Management
Vol. 46, Issue 8
September 2020
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Small-Cap Allocations: Timing the Entry
Eric Sorensen, Sebastian Lancetti
The Journal of Portfolio Management Aug 2020, 46 (8) 51-63; DOI: 10.3905/jpm.2020.1.169

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Small-Cap Allocations: Timing the Entry
Eric Sorensen, Sebastian Lancetti
The Journal of Portfolio Management Aug 2020, 46 (8) 51-63; DOI: 10.3905/jpm.2020.1.169
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  • Article
    • Abstract
    • HISTORY 1960–1995: THE CYCLICAL DRIVERS OF SMALL-CAP RETURNS
    • HISTORY POST-1995: THE CYCLICAL DRIVERS OF SMALL-CAP RETURNS
    • HISTORIAL VALUATION FOR SMALL CAP
    • CONCLUSION
    • ADDITIONAL READING
    • APPENDIX
    • ENDNOTES
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