Swedroe: Small-Cap ‘Good’ In 2013

Last year was good for active small-cap managers, but how good?

I recently talked about the performance of stock pickers in 2013. The result was that, for the most part, they fell flat. Today we’ll examine how small-cap stock pickers fared in 2013.

Last year certainly provided active managers with plenty of opportunities to outperform, especially for active small-cap managers.

For example, while the Vanguard S&P Small-Cap 600 Index Fund (VSMSX) returned 41.2 percent, the two top performers in the S&P 600 Index—Anika Therapeutics (ANIK) and Zale Corp. (ZLC)—returned 283.9 percent and 283.7 percent, respectively.

Five other stocks returned more than 200 percent, and 10 others returned more than 150 percent. In fact, there were 57 stocks that returned more than 100 percent, 92 that returned more than 80 percent, 121 percent that returned more than 70 percent, 176 that returned more than 60 percent and 218 that returned more than 50 percent.

On the flip side, the worst-performing stock—Tower Group International (TWGP)—lost 78.5 percent. Five other stocks lost at least 40 percent, six others lost at least 30 percent,  12 others lost at least 20 percent and a total of 77 stocks produced negative returns.

Given the huge number of stocks that outperformed the S&P 600 Index by wide margins, and given the huge number that produced negative returns (meaning they underperformed the S&P 600 by at least 41 percent), 2013 was a stock picker’s dream, providing tremendous opportunity to generate alpha; that is, outperform their benchmark.

Yet the 41.2 percent return of the Vanguard S&P Small-Cap 600 Index Fund (VSMSX)—almost as much as the 41.3 percent return of the S&P Small Cap 600 Index—allowed it to outperform 80 percent of all actively managed small-cap funds.

Even more damning is that the passively managed DFA Small Cap Fund (DFSTX) returned 42.2 percent, and outperformed 83 percent of all actively managed small-cap funds. (Full disclosure: My firm Buckingham recommends Dimensional funds in the construction of client portfolios.)

The conclusion we can draw is that while such wide differences in returns provide the opportunity for active managers to outperform, there’s just no evidence that they’re able to persistently exploit those opportunities. The other conclusion we can draw is that there really is no such thing as a stock picker’s market.

Keep that in mind that next time you hear some “talking head” make that claim.

Larry Swedroe is director of Research for the BAM Alliance, which is part of St. Louis-based Buckingham Asset Management.