Why Abandon a Rising Star?
Rothschild & Co Asset Management US Inc., September 2019
Many investors allocate their U.S. equity holdings among both large-cap stocks for their relative stability, and small-cap stocks for their expectational upside, which refers to the potential for companies to significantly outperform market expectations over the long term. But what happens to the opportunity offered by small-caps when they become mid-caps?
Tina Jones: Many investors allocate their U.S. equity holdings among both large-cap stocks for their relative stability, and small-cap stocks for their expectational upside, but – in doing so – they fail to recognize that this rigid approach may force them to make reallocation decisions based on an arbitrary market-cap cutoff rather than on investment merit.
But what happens to the opportunity offered by small-caps when they grow into mid-caps? Managers of small-cap funds are typically obligated to abandon them – even when they have not reached their full potential.
But why sell stocks that have consistently outperformed their smaller and larger peers over time?
Small/mid-cap managers are uniquely positioned to identify these rising star stock opportunities early in a company’s lifecycle, and can hold them so they may reach their full potential. In addition, mid-cap companies – in general – have more seasoned management and more attractive risk/return profile than their small-cap peers.
Each of these reasons we offer Pacific Funds Small/Mid-Cap – which allows investors to continue holding these rising stars.
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All investing involves risk, including the possible loss of the principal amount invested. There is no guarantee that the Fund will achieve its investment goal. Equity securities tend to go up or down in value, sometimes rapidly and unpredictably. Large-capitalization companies tend to have more stable prices than small- or mid-capitalization companies, but are still subject to equity securities risk and their prices may not rise as much as the prices of companies with smaller market capitalizations. Small-capitalization companies may be more susceptible to liquidity risk and price volatility risk and more vulnerable to economic, market and industry changes than larger, more established companies. Mid-capitalization companies may be subject to greater price volatility risk and more vulnerable to economic, market and industry changes than larger, more established companies.
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Investors should consider a fund's investment goal, risks, charges, and expenses carefully before investing. The prospectus and/or the applicable summary prospectus contain this and other information about the Fund and are available from your financial advisor. The prospectus and/or summary prospectus should be read carefully before investing.
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Rothschild & Co Asset Management US Inc. is the sub-adviser for Pacific FundsSM U.S. Equity Funds, and is unaffiliated with Pacific Life Insurance Company.
No bank guarantee • May lose value • Not FDIC insured