Friday, January 6, 2017

A Closer Look at the Performance of the AIM Fund's Small Cap Stocks in 2016: (Value versus Growth)

AIM Small Cap Equity Fund by Style and Size

The students in the AIM program manage three portfolios for Marquette University's endowment. The AIM Small Cap Equity Fund is benchmarked to the Russell 2000 Index (a small cap blend of 2000 publicly traded firms in the US with market capitalizations between about $500 million and $3 billion). The students employ a bottom-up, fundamental approach to portfolio construction (able to choose any stock in the index as long as the portfolio remains sector neutral).

Since its inception in September 2005, the AIM Small Cap Fund has had a tilt toward growth. As can be seen in the graph below, as of 12/31/2016 over 50% of the stocks were considered 'growth' according to Morningstar metrics; while only 5% were tagged as 'value' stocks. Normally the overall performance of the portfolio is not impacted greatly by the growth tilt; however, in 2016 small cap value stocks substantially outperformed growth stocks (see second graph below).

AIM Small Cap Equity Fund Statistics as of 12/31/2016

In 2016, small cap value stocks averaged 31.7% total return vs 11.3% for small cap growth stocks. This trend was also evident in the fourth quarter (small cap value stocks gained an average of 14.1% vs. 3.6% for growth).

US Stock Market Performance for 2016 by Size and Style

The table below shows the AIM Small Cap Equity Fund performance for 2016 versus the Russell 2000 and Russell 2000 Growth Indexes. The Fund returned 16.56% for the year - this is below the Russell 2000 which returned 21.31%; however, the Russell 2000 Growth Index returned 11.31%. 

AIM Small Cap 2016 Performance vs. Russell 2000 and Russell 2000 Growth Indexes
The students in the AIM program do not attempt to 'time the market' and instead focus on adding and holding high quality equities with an investment window of 3 to 5 years. While small cap growth and value stocks tend to perform similarly over the longer term, there are times (i.e. 2016) when performance of the two deviate. It is our philosophy that by being bottom-up, fundamental analysis driven, the equity funds managed by the AIM students for the University's endowment will achieve long-term returns in excess of the Russell 2000.

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