Charles Bobrinskoy, Vice Chairman and Head of Investment Group for Ariel Investments, joined Julie Cooling, Founder and CEO of RIA Channel, to discuss how regulatory changes may benefit small-cap stocks.
Ariel Investments was founded in 1983 based on the idea of the historical outperformance of small-cap stocks. At the time, most investors were focused on small-cap growth investing. As a follower of Warren Buffett and Benjamin Graham, Ariel’s founder, John Rogers, Jr., decided to focus on small-cap value investing. Rogers believes that a firm led by female and minority investors offers diverse perspectives that lead to better decision-making.
While small-cap value stocks have underperformed large-cap growth stocks for some time, Bobrinskoy believes that investing in under-the-radar stocks with strong cash flows will eventually have strong performance. Popular stocks tend to trade at higher valuation levels and are vulnerable to changes in sentiment and momentum. In the long run, returns to stocks are driven by cash flows and not popularity.
Ariel defines small caps as companies with a market capitalization below $2.5 billion. The team purchases stocks at or below that market cap level but can hold winners that grow beyond that limit.
The lighter regulatory touch that many expect from the current administration is expected to favor small-cap stocks, especially the financial and energy sectors. An expected pickup in merger activity can also benefit small stocks. In addition, small-cap indices have more domestically focused companies, while firms in the S&P 500 tend to be more global in nature.
Resources: