While small-cap stocks have generally underperformed large-caps in recent years, small-cap value has kept pace with its larger-cap value peers. The average small-cap value portfolio gained 13.8% (annualized) for the three years ended June 2007, slightly edging the 13.6% performance of large-cap value. For the five-year period, small-cap value actually beat large-cap value, 14.1% to 11.6%.
Value-oriented securities tend to feature modest price-to-earnings, price-to-book ratios, or high dividend yields (or any combination thereof). Small-cap value companies have the added advantage of often serving as attractive takeover candidates.
The financial services industry forms a significant portfolio of small-cap value vehicles, with the sector representing about one-third of the iShares Russell 2000 Value Index Fund (IWN), a proxy for the most widely used small-cap value benchmark. Consequently, larger trends impacting the financials sector, including interest rates and subprime mortgage woes, may have a disproportionate impact on small-cap value funds.
One of the better performers in this sector, the $88-million Paradigm Value Fund (PVFAX) invests in U.S. companies with market caps of $1.5 billion
