WhatsImpactingSmallMidCap TROW 2011
Transcript of WhatsImpactingSmallMidCap TROW 2011
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What's ImpactingSmall-/Mid-Cap Investing?
Gregory McCrickard
Heather McPherson
David Wagner
David Wallack
Brian Dausch (moderator)
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BRIAN C. DAUSCH, CFA
14 years of investment experience,
13 with T. Rowe Price
Portfolio specialist in the Equity Division
of T. Rowe Price since 2007
portfolio specialist
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GREGORY A. MCCRICKARD,
CFA
27 years of investment experience,25 with T. Rowe Price
Portfolio manager of the Small-Cap Core
Strategy since 1992
portfolio manager
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DAVID J. WALLACK
22 years of investment experience,
21 with T. Rowe Price
Portfolio manager of the Mid-Cap Value
Strategy since 2000
portfolio manager
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HEATHER K. MCPHERSON
11 years of investment experience,
9 with T. Rowe Price
Associate portfolio manager of the
Mid-Cap Value Strategy since 2005
portfolio manager
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Agenda
Why do small- and mid-caps make sense in adiversified portfolio?
Outlook for small- and mid-caps relative tolarge-caps is mixed
Valuations
Fundamentals Performance cycles
Trends and opportunities
IPO and M&A activity Growth vs. value
Pockets of opportunity
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Small- and Mid-Caps Have Outperformed,but Performance Comes in Cycles
U.S. Small-Cap
Equities
U.S. Mid-Cap
Equities
U.S. Large-Cap
Equities
Precious Metals Corporate
Bonds
Cash
Returns
Standard Deviation
Annualized Asset Class Returns and Standard Deviation Since 19261
90
110
130
150
170
190
'50 '54 '58 '62 '66 '70 '74 '78 '82 '86 '90 '94 '98 '02 '06 '10
Recessions
Small-Cap/Large-Cap Relative Strength
1Precious Metals Returns only since 1947.
All returns are annualized returns from 1926-September 30, 2011, except Precious Metals, which is from 1947-September 30, 2011. Equity returns based onCenter for Research in Security Prices, University of Chicago Data, Large: Decile 1, Mid: Decile 2 and 3, Small: Decile 4 and 5. Precious Metals Returns basedon CRB CCI Precious Metals Index. Bonds based on U.S. IT Government Index from 1926-1972, Lehman Bros. Government Corporate Index from 1973-1975,Barclays Cap. U.S. Aggregate Index from 1976-September 30, 2011. Cash based on 30-day T-bill yield.
Sources: CRSP Center for Research in Securities Prices-Graduate School of Business, University of Chicago, T. Rowe Price, The Leuthold Group October 2011Past performance cannot guarantee future results.These charts are shown for illustrative purposes only and do not represent the performance of any specific security. Unlike U.S. Treasuries and corporate bonds,stocks are not guaranteed as to the timely payment of interest and principal.
Relative Performance of Small-Caps Versus Large-Caps
Small-CapsOutperform
Small-CapsUnderperform
As of 30 September 2011
30%
24
18
12
6
0
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21.1
10.3
12.6
2.2
0.7
0.6
2.1
3.1
1.3
0 5 10 15 20 25 30 35
MSCI World Index
S&P 500 Index
Russell 3000 Index
Russell 2500 Index
CAC 40 Index
DAX Index
TOPIX
FTSE 100 Index
MSCI EM Index
Trillions
1
Small- and Mid-Caps Make Up a Large Partof the Worlds Investable Universe
World IndicesMarket CapitalizationTotal Market Value (U.S. $ Trillions)
30 September 2011
Emerging Markets
Various Developed Markets
World Market
$
U.S.
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10
14
84
21
0
5
10
15
20
25
Large Mid Small MicroMerrill Lynch Size Composites
AverageN
umberof
Sell-Side
Analysts
Small- and Mid-Caps Are OftenUnderfollowed, Which Creates Opportunity
Sources: FactSet, Merrill Lynch Small-Cap ResearchReprinted by permission. Copyright 2011 Merrill Lynch, Pierce, Fenner & Smith Incorporated. The use of the above in no way implies that Merrill Lynchendorses the views or interpretation or the use of such information or acts as any endorsement of T. Rowe Price use of such information. The informationis provided as is, and Merrill Lynch does not warrant the accuracy or completeness of the information.
30 September 2011
Average Number of Sell-Side Analysts Covering a Stock by Size
Market-CapBucket($Millions)
Number of Companies
Total Market Value ($ Billions) of All Companies in Market-Cap Bucket
0 500 1,000 1,500 2,000 2,500 3,000
$0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000
LargestOver 10,000
Mid1,000-10,000
Smallest
0-1,000
11,000
Number of Companies
Market-Cap
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Small-Cap Relative Valuations Do NotLook Cheap
The New Horizons Fund relative P/E compared to thelarge-cap-dominated S&P 500 is at a 25-year high.
New Horizons Fund Relative P/E
P/E Ratio of the Fund's Portfolio Securities relative to the S&P 500 P/E Ratio
The funds P/E ratio is an average, unweighted number based on 12-month forward earnings per share as estimated by the funds investment manager ateach quarter-end. The funds P/E ratio is representative of small cap stock valuations and is shown for illustrative purposes only. This is not intended tobe an offer of the New Horizons Fund.
0.0
0.5
1.0
1.5
2.0
2.5
196
1
1967
197
3
197
9
1985
199
1
1997
200
3
200
9
201
1
As of 30 September 2011
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Is Small-Cap Earnings Momentum Shifting?
Small-cap earnings growth has decelerated. Large- andmid-cap earnings momentum has slowed, but not as much.
31.424.727.020.217.3Bottom 2,000
31.523.124.922.317.3Small-Cap (Next 1,200)
Median Year-Over-Year Operating Earning Momentum
27.5
22.3
18.7
13.6%
Q3 2010
31.1
24.1
18.6
18.0%
Q4 2010
30.715.312.7Micro-Cap (Last 600)
30.922.224.3Mid-Cap (Next 900)
23.0
14.4%
Q2 2010
18.9
18.0%
Q1 2011
Large-Cap (Top 300)
Mega-Caps (Top 50)
18.7
17.2%
Q2 2011
As of 30 September 2011
Median Operating Earning MomentumLargest 3,000 Companies
Source: The Leuthold Group, October 2011
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13 Source: The Leuthold Group, October 2011
If we are heading for an economic recession, we are likely tosee more turbulence. Non-economic recessions have beenmuch shorter lived, which could signify that an upturn is on
the horizon.
What Does a Bear Market Tell Us?
30 September 2011
Economic Versus Non-Economic Bear MarketsDow Jones Industrials, 1899 to Present
Non-economic bear markets have been much shorter thanrecession-induced ones, but they have inflicted almost as much damage.
5.0-16.83 October 201129 April 2011Latest Decline (DJIA)
5.0-29.13 October 201129 April 2011Russell 2000
1945 to Date
1899 to Date
1945 to Date
1899 to Date
Date of Low
Medians:
Medians:
6.0-26.9
6.5-27.1Non-Economic Bear Markets
(Market Decline NotAssociated With U.S.
Recession)
18.1
21.9
Duration(Months)
-30.0
-36.9%
Pct.Decline
Economic Bear Markets(Decline Occurring Prior to or
During U.S. Recession)
Date of High
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IPO Market Has Been Relatively Quiet
Sources: Securities Data Corp., FactSet Research Systems, BofA Merrill Lynch Small-Cap Research
30 September 2011
0
5,000
10,000
15,000
20,000
25,000
30,000
3Q95 3Q97 3Q99 3Q01 3Q03 3Q05 3Q07 3Q09 3Q11Procee
ds
(inm
illionso
f$)
0
50100
150
200
250
300
3Q95 3Q97 3Q99 3Q01 3Q03 3Q05 3Q07 3Q09 3Q11
Num
berofIPOs
IPO Market Trends Proceeds
IPO Market Trends Number
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Small-Cap Cycle: Value vs. Growth
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.004.50
Dec-78
Dec-81
Dec-84
Dec-87
Dec-90
Dec-93
Dec-96
Dec-99
Dec-02
Dec-05
Dec-08
Sep-11
As of 30 July 2011
Performance of Russell 2000 Value VersusRussell 2000 Growth
Past performance cannot guarantee future results.
Sources: Russell Investment Group, BofAML Small-Cap ResearchIt is not possible to invest directly in an index.These charts are shown for illustrative purposes only and do not represent the performance of any specific security.
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Mid-Caps Have Enjoyed Strong RelativePerformance
Past performance cannot guarantee future results.
Source: T. Rowe PriceIt is not possible to invest directly in an index.These charts are shown for illustrative purposes only and do not represent the performance of any specific security.
30 September 2011
Performance Comparison: Russell Mid-Cap IndexVersus S&P 500
0
200
400
600
8001,000
1,200
1,400
1,600
1,800
2,000
Dec-85
Dec-87
Dec-89
Dec-91
Dec-93
Dec-95
Dec-97
Dec-99
Dec-01
Dec-03
Dec-05
Dec-07
Dec-09
Index
Leve
l
Russell Mid-Cap Index S&P 500
Sept-11
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0.40
0.60
0.80
1.00
1.20
1.40
12/31/78 12/31/83 12/31/88 12/31/93 12/31/98 12/31/03 12/31/08
0.40
0.60
0.80
1.00
1.20
1.40
12/31/78 12/31/83 12/31/88 12/31/93 12/31/98 12/31/03 12/31/08
The Mid-Cap Average Is, at Best, ValuedComparably to Large-Caps
Source: T. Rowe Price
30 September 2011
EV/Sales
Russell Mid-Cap vs. Russell Large-Cap
Trailing 12-m P/E
Average
Average
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18
0.60
0.80
1.00
1.20
1.40
1.60
1.80
12/31/78 12/31/83 12/31/88 12/31/93 12/31/98 12/31/03 12/31/08
Russell Mid-Cap vs. Russell Large-Cap
The Mid-Cap Average Is, at Best, ValuedComparably to Large-Caps
Price/Book
Dividend Yield
Source: T. Rowe Price
30 September 2011
0.40
0.60
0.80
1.00
1.20
1.40
12/31/78 12/31/83 12/31/88 12/31/93 12/31/98 12/31/03 12/31/08
Average
Average
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Mid-Cap Value Versus Mid-Cap Growth Performance
Growth has Been Outperforming ValueAmong Mid-Caps
Past performance cannot guarantee future results.Source: The Leuthold Group, October 2011These charts are shown for illustrative purposes only and do not represent the performance of any specific security.
As of 30 September 2011
0
20
40
60
80
100
120
140
160
Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11
IndexLevel
118
120
122
124
126
128
130
132
134
Sep-09 Mar-10 Sep-10 Mar-11 Sep-11
IndexLevel
Value
Growth
Growth
Growth
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Is Cash the Next Catalyst for M&A Growth?
1 Largest 1,500 stocks, excluding financials, utilities, and autos. Data smoothed on a trailing twelve-month basis.Sources: MergerStat, Corporate Reports, Empirical Research Partners Analysis, FactSet, JP Morgan.
0
200
400
600
8001,000
1,200
1,400
1,600
68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
Vo
lumeo
fU.S
.M&A
Transactions
0
2
4
68
10
12
Cas
han
dEqu
iva
len
ts
asa
Shareo
fB
alance
Shee
tAsse
ts1Cash M&A Deal Volume
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Current
Debt as Percentage of Total Assets (S&P 500)
The average is 32.9%
38%
36
34
32
30
28
26