The small-cap market as proxied by the Russell 2000 index is down 13.03% from the beginning of August through August 24th. This compares to an 8.69% drop for the large-cap S&P 500. Small cap was still outperforming large cap over the trailing one-year, three-year, and five-year periods ending August 24th.
The small-cap Paradigm Value Fund (PFVAX) and “SMid-cap” Paradigm Select Fund (PFSLX) held up well during this difficult period relative to their benchmarks and peers. The Value Fund is in the top quartile for the one-month and one-year periods. The Select Fund is also in the top quartile for YTD, and 5th percentile for one-year. In fact, Morningstar upgraded both funds to five-star ratings at the beginning of August.
You’d never know it from the doom-and-gloom media coverage, but small cap companies overall are doing very well. On average, small-cap companies reported 27% earnings growth for the second quarter 2011 compared to the same quarter last year. Despite this performance, more than 17% of the companies in the Russell 2000 are still trading at less than 10X forward earnings estimates.
We believe our quality approach helped us during the downturn, and puts us in a good position for what we anticipate to be a gradual return to the slow-growth scenario. We are very excited about the prospects of the companies in our portfolio and confident in their management teams’ ability to build shareholder value.
~ Paradigm Capital Management