Trump victory pushing U.S. fund managers into small-cap shares

November 16, 2016 4:47 PM EST

U.S. President-elect Donald Trump in Manchester, New Hampshire, U.S., October 28, 2016. REUTERS/Carlo Allegri/File Photo


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By David Randall

NEW YORK (Reuters) - President-elect Donald Trump's victory last week is pushing U.S. fund managers into the shares of small, domestic-oriented companies that they expect to benefit should Trump cut back on regulations and renegotiate free trade agreements as promised.

Already, the Russell 2000, the benchmark for small companies in the United States, is up nearly 12 percent over the past five trading days, a performance nearly triple the 4.4 percent gain of the large-cap S&P 500 over the same time. Fund managers say they expect the small-cap rally to continue into 2017 as the incoming Trump administration begins to put policies in place.

"Right now this is the hope rally, but it will be a while before you have any real changes out there that flow through to earnings," said Barry James, president of Dayton, Ohio-based James Advantage Funds.

James is moving approximately 40 percent of his multi-cap fund into small-cap shares, up from 10 percent earlier this year, by buying companies such as Neenah Paper Inc, which manufacturers filtration and specialty paper in plants in Wisconsin and Ohio, and outsourcing company Convergys Corp, which has its primary call centers in Florida and Ohio.

The move into small-caps comes at a time when the category had underperformed larger-caps over the past one and three years, leaving valuations more attractive regardless of the outcome of the election, said Martin Jarzebowski, a portfolio manager at Federated Investors in New York.

Trump's administration is expected to cut back on regulations across industries, leading to more mergers and acquisition activity, Jarzebowski said.

"We're looking at adding acquisition targets" in sectors such as industrials and materials, Jarzebowski said.

Yet Trump's administration will also likely bring higher market volatility, which would hurt small-caps, which often are thought of as riskier than larger companies, said Steven DeSanctis, an equity strategist at Jefferies in New York.

At the same time, small-cap exchange traded funds brought in $4.2 billion in the week since Trump's victory, DeSanctis added, which was the biggest inflow since May 2008 and suggests that markets already have priced in any benefits to the category.

Tim Cunningham, a portfolio manager at Santa Fe, New Mexico-based Thornburg Investments, said he was moving away from dividend-stocks like Molson Coors Brewing Corp and adding to his positions in regional banks such as Silicon Valley Bank-parent SVB Financial Group that should benefit from higher interest rates.

"Even with a small increase in rates, it will immediately see a big increase in its earnings. That's basically pure margin," Cunningham said.

Cunningham has also been adding to his position in energy-drink company Monster Beverage Corp thanks to its international growth. The company's shares are down 6.7 percent over the past five days after voters in Boulder, Colorado, Cook County, Illinois and the San Francisco Bay Area passed new taxes on sugar-sweetened beverages.

He is also looking to add to large-cap technology shares such as Amazon.com Inc, Facebook Inc and Google-parent Alphabet Inc that have been hurt by concerns that the incoming Trump administration could dampen their foreign sales and make it harder to recruit and retain talented engineers.

"These are dominant businesses with huge barriers to entry, and we could be getting an opportunity if they continue to pull back," Cunningham said.

(Reporting by David Randall; Editing by Will Dunham)



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