While small-cap stocks modestly outperformed the overall US equity market in June, the Legg Mason Royce US Small Cap Opportunity fund generated a negative absolute return that month.

The fund, which is managed by Citywire + rated William Hench, lagged its benchmark primarily due to ineffective stock selection and sector allocation.

Small-cap stocks modestly outperformed the overall US equity market in June, as the Russell 2000 Index returned 0.72%.

Over the first six months of the year, small-cap stocks have gained 7.66%.

Small-cap growth stocks – as measured by the Russell 2000 Growth Index – outperformed their small-cap value counterparts – as measured by the Russell 2000 Value Index.

Small-cap growth stocks and their small-cap value counterparts gained 0.78% and 0.61%, respectively, in June.

In terms of stock selection, the Legg Mason Royce US Small Cap Opportunity fund’s holdings in the industrials, energy and materials sectors were the largest detractors from performance in June, according to its latest fund commentary.  

This was, however, partially offset by the fund’s holdings in the health care and information technology sectors.

From a sector allocation perspective, the fund’s overweight position in the materials and energy sectors were the largest negatives for the fund’s returns in June.

In contrast, its underweight position in financials and health care were the largest contributors to the fund’s results.

The Legg Mason Royce US Small Cap Opportunity fund is available for professional and retail investors in Asia – including Hong Kong, Singapore, Taiwan and China. In China, the fund is available to investors via the qualified domestic institutional investors scheme.

The fund invests at least 70% of its net asset value in a diversified portfolio of equity securities issued by small cap US companies that are listed or traded on regulated markets in the US.

It defined small cap US companies as those with market capitalisations of less than US$3 billion.

The fund returned 16.64% over the past one year ended 30 June, and 10.88% over the past three years ended June 30. 

Outlook

Legg Mason said the portfolio manager has further examined each of the portfolio companies to determine the balance between domestic and international revenues in light of the ongoing global trade issues.

Global trade uncertainty created headwinds for many of Legg Mason fund’s positions in the small cap sector during second quarter ended 30 June.

Stocks have shown weakness albeit US companies reported strong results.

‘We anticipate that this will eventually shift, especially given that many of these holdings are showing notable earnings strength,’ Legg Mason said in its fund fact sheet.

Legg Mason said the US economy continues to strengthen, which it sees as a positive for many of the fund’s holdings.

Mark Sherlock, head of US equities at Hermes Investment Management, shared the concerns on the prospect of a trade war affecting US equities market.

He, however, concurred that the underlying US economy remains strong.

‘We believe stock performance will shift to more economically sensitive sectors, which have so far lagged the market,’ he said. The banks and industrials sectors are such examples.  

Sherlock manages Hermes US SMID Equity fund, which is registered for sale in Singapore.  The fund invest in securities of US small- and mid-cap companies. The fund returned 10.7% over the past one year ended 30 June.