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    Small Caps – Aus and US

    Dear James and Team, I am reading how Small Caps both here and in the US have underperformed the Large Cap sector for several years. In your FY24 video update you confirmed the same. So my questions are: 1. What do you think will be the catalysts for Small Caps to start playing catch up? (Interest rate cuts or will it be very stock / sector specific?) 2. At current prices, what are the highest conviction shares in your Small Cap portfolio? And would ABB be one of them? 3. And lastly, would you consider adding an American Small Cap ETF (i.e. Russell 1000) to the ETF portfolio? If so what catches your eye? Sorry for so many questions, so many thanks in advance. Keep up the great work. Charles

    Answer

    Hi Charles,

    A very timely question with the global small caps enjoying an extremely strong few weeks, e.g., the US Russell 2000 has surged over 10% in less than two weeks. Moving onto the specifics of your question:

    • The catalyst for the small caps was the US CPI (inflation read) earlier in the month which cemented the markets opinion that the Fed will cut rates three times by January 2025. Interest rates are more important for small caps as they rely more on access and cost of capital over above retained earnings to grow.
    • Our highest conviction calls in our Emerging Companies Portfolio is a tough one, we love CAT and think it has a very bright future even after the share price has rallied so strongly. We would also highlight PDN given current prices, CNI as a play on lower rates, and ABB as you mentioned given recent weakness. Expect some alerts for this portfolio over the next week or so, with some new positions, as we rejig it for what may come next.
    • We would consider adding a US small cap ETF to our Core ETF Portfolio, although we have already increased our local small cap. (VSO) holding this week. The iShares IJR is our preferred.
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    Russell 2000 (small caps)
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