Managers Unbowed by a Fed Move; Rates Are Just One Piece Of the Puzzle, Funds Say, When Valuing Small Caps
Dow Jones Newswires</br></br>NEW YORK -- Small-capitalization stocks don't do nearly as well when the Federal Reserve is raising interest rates, so what are small-cap portfolio managers doing to prepare? Not a heck of a lot.</br></br>The annual gain of the Russell 2000 Index of small stocks falls to roughly 3.5% when the Fed is raising rates, compared with its historical average advance of 12%, according to James Furey, chief small-cap analyst at Lehman Brothers.</br></br>The reasons for the falloff include smaller stocks being closely tied to the performance of the U.S. economy, which can be slowed by interest-rate increases. Also, smaller businesses face the prospect of having to pay more for loans, which could curb their expansion.</br></br>When the Fed has raised rates in the past, defensive areas like energy and certain health-care stocks fared better, while economically sensitive shares, such as retailers, home builders and manufacturers lagged behind. But don't assume that portfolio managers are positioning themselves to follow the past performance.