Past Performance Does Not Guarantee Future Results…. Particularly the RECENT Past

The FTSE Russell 2500 Growth Index* (R2500G) is considered the benchmark for small and mid-cap growth stocks. In our White Paper on finding safe investments, we presented a few brief charts proving that, contrary to popular perception, the performance of growth and value had been tied between 2010 – 2017.

Published in August of 2021, we noted that growth had crushed value since the start of 2017 in Large Cap. Specifically, the Russell 1000G rose over 184% while the Russell 1000V rose “only” 118%. That same effect is even more pronounced comparing the Russell 2500 Growth and Russell 2500 Value Indexes.

The growth variant of the index rose 128%, while the value variant rose only 53%, a whopping 75% spread. Since we authored that piece, the spread has begun to collapse. That recent compression – where value has begun catching up to growth – has led many folks to ask us if we think they “missed” the value rotation.

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This paper makes the following three points:

  • The mean reversion in the 2500 benchmarks will continue, with growth falling sharply relative to value
  • The reason for this is painfully simple in our view
  • Allocators should move from index funds to active managers in the R2500G sector

The chart below shows that the percentage of firms in the Russell 2500 indexes that lose money is falling from dot.com highs of ~50% in Growth and ~35% in Value. As this paper will show, history suggests the loss-making firms in the R2500G will inflict severe damage on their owners compared to their profitable neighbors in that same index.

The Percentage of Stocks in the R2500G Losing Money has NEVER Been Higher

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Mid and Small Cap Mean Reversion: Will Value Trounce Growth?

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The topics discussed in this article are aimed at seasoned professionals, as such, we have included some extra for anyone seeking out more information related to the topics above.

 

[1] The easiest way to find our collection of papers is to simply enter the following, with the quotations, into google search: “Kailash Concepts” “losing money”

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The information, data, analyses, and opinions presented herein (a) do not constitute investment advice, (b) are provided solely for informational purposes and therefore are not, individually or collectively, an offer to buy or sell a security, (c) are not warranted to be correct, complete or accurate, and (d) are subject to change without notice. Kailash Capital Research, LLC and its affiliates (collectively, “Kailash Capital Research, LLC ”) shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information herein may not be reproduced or retransmitted in any manner without the prior written consent of Kailash Capital Research, LLC . In preparing the information, data, analyses, and opinions presented herein, Kailash Capital Research, LLC has obtained data, statistics, and information from sources it believes to be reliable. Kailash Capital Research, LLC , however, does not perform an audit or seeks independent verification of any of the data, statistics, and information it receives. Kailash Capital Research, LLC and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your tax, legal, and accounting advisors before engaging in any transaction. © 2021 Kailash Capital Research, LLC – All rights reserved.

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February 2, 2022 |

Categories: Quick Takes

| Authors: , ,  and 

February 2, 2022

Categories: Quick Takes

Authors: , ,  and 

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