Individual Investors Miss Out on Small-Cap Stock Rally

Wednesday, 22 Feb 2012 07:50 AM

By Dan Weil

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Small-cap stocks are having themselves a nice big party, but individual investors have decided not to attend.

When financial market participants are willing to embrace more risk, small-cap stocks outperform large-caps. And that’s what has happened since the stock market hit its lows in early October.

While the Standard & Poor’s 500 Index has risen an impressive 27 percent during that period, the Russell 2000 Index of small-cap stocks has done even better, soaring 35 percent.

But individual investors have pulled money out of U.S. small-cap mutual funds in 37 of 40 weeks since May, according to EPFR Global, The Wall Street Journal reports

"You would think there would be a strong response from retail investors," Bhupinder Singh, small-cap equity strategist at J.P. Morgan, tells the paper. But they’re "unenthused."

And institutional investors aren’t exactly going nuts themselves over small-cap stocks, he says. The rally is taking place amid light volume.

Sentiment is mixed as to whether small-caps will keep rising. On the bearish side, the price-earnings ratio for small-cap stocks is historically high.

But bulls say accelerating U.S. economic growth will sustain the ascent. “Small-caps are a good place to be because they've got more room for profit growth than large-caps,” Adam Peck, co-manager of Heartland Value Plus fund, tells The Associated Press.

Large companies’ profit margins have almost rebounded to pre-recession levels, while smaller firms have more ground to make up, he says.





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