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Tuesday February 24, 6:20 pm Eastern Time
FUND VIEW-1998 looks positive for U.S. small caps
LONDON, Feb 24 (Reuters) - The outlook for U.S. smaller cap equities in 1998 has turned positive after being overshadowed by mid and large cap assets last year, a U.S. fund manager said on Tuesday.
In a paper released to Reuters, Stan Wisneski, manager of U.S. Smaller Companies Investment Trust Plc(quote from Yahoo! UK & Ireland: USS.L) give his reasons why the tide will turn for smaller companies this year.
Although recent sensational large cap returns have rewarded investors, valuations have soared putting small caps at an ''unsustainable discount to large caps.''
Smaller companies would be less affected by slower economic growth following the Asian economic crisis than large caps as they should be less exposed to overseas markets.
Their narrower product focus might also mean they are less exposed to a broad-based decline in the overall economic environment than large caps.
In the past three years the number of mid cap equity funds has increased by 40 percent after years of heavy investment in the sector.
''We expect this trend to continue and feel that it will contribute to the demand for smaller companies,'' Wisneski said in the paper.
He continued: ''Looking towards 1998, we continue to be optimistic about the U.S. equity market.
''The U.S. economy continues to grow and problems in Asia should help keep a lid on inflation.''
He said the decline in interest rates during the second half of 1997 should continue this year ''which is good news for multiples.''
''Mergers and acquisitions continue apace and corporate America has never been in better financial shape,'' Wisneski said.
However he warned that a sharp rise in interest rates would jeopardise market performance, while the impact of the Asian financial crisis could hit the market through a ''precipitous fall in corporate profits.''
Over the past four decades, small company stocks measured by the Ibbotson Small Company Index and the Wilshire Mid Cap 750 have produced returns far in excess of larger companies as measured by the S & P 500, Wisneski said.
''A $10,000 investment in smaller companies in 1960 would have grown to over $1.7 million at the end of 1997.
''That same $10,000 invested in large companies would have grown to only $648,000,'' he said.
Wisneski said: ''We feel that investors who purchase select smaller cap stocks stand to reap substantial gains.
''Smaller companies have traditionally been one of the most dynamic sectors of the U.S. economy, responsible for much of the job creation and a leading source of innovation and technological change.
''These companies have also been a tremendous source of wealth creation for investors over the long-term,'' Wisneski said.
US Smaller Companies Investment Trust is managed by Wellington Management Company.
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