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Micro Is No Small Thing
Satuit Capital Micro Cap Fund
Interview with: Robert Sullivan

Author: Dave Jennings
Last Update: , :

For complete profile and charts on Satuit Capital Micro Cap Fund
Started out of an 'intellectual curiosity,' the Satuit Micro Cap Fund never left Lipper's top-quintile in its three years of history. Robert Sullivan talks about the benefits in the trend of really small companies outperforming in the first year of a recovery phase.

Satuit Capital Micro Cap Fund

A: It was publicly traded in 2000 and 2001. In 2000, it was either the number one or two small-cap blend fund until Morningstar changed it. In 2001, the fund was up 38% and that was the tenth best performing equity fund in the country.

Q: Nobody did well in the second half of 2002, no matter what they did. But that sentiment turned October 9th and hasn't gone to that extreme since then. Small companies' tendency to outperform in a recovery has proved historically correct so far.

A: I did an analysis of economic cycles. We looked at past recessions and expansions. We looked at one year after a recession, two years and what we called the non-recessionary periods. What was fascinating to me, one year after the recession ends, the micro-cap universe, which is defined by CRSP, the Center for Research and Security Prices, was up more than 30%. Large cap is up 16%. Mid cap is up 21% and small caps are up 24%. It's the small and micro cap that certainly out perform one year after a recession. This is going back to February 1945. Two years after a recession, you see a little bit of a difference. Large and mid cap outperform small and micro cap. However, when I talk to advisers, I say, you know what? I donít really care about one and two years after a recession, because I'm not going to know when we're out of a recession until 18 or 21 months until after we're out of it.

Q: The economists like to set the official dates, but it is really only an arbitrary concept.

A: In other words, by the time you know that is when the economists say we were in a recession and out of one. It's going to be 18 months after that fact. What I really care about is what happens during a non-recessionary cycle because I know that the economy has bottomed. I know that we're going to be expanding in 24 months, so where do I want to be now to capture what will happen in two or three years from now? That's my job as an investment advisor, not to figure out what the trading pattern is over the next 30 days. So, when I look at the non-recessionary periods what you come up with is: micro caps have an annualized return of 16%. Small caps are up about 14.5%. Mid cap and large cap is each up 12%. Inside a booklet I wrote is an analysis of the efficient frontier -- if you believe in a diversified portfolio some of your allocation needs to be small and micro cap. When I talk to advisors about that, I challenge them. Bring me any equity portfolio you have, and I'll bet you if I add small and micro cap to it I can make a more efficient portfolio.

Q: You get more bang for your buck from these sectors when it turns back up from the low end of a cycle.

A: Absolutely. We have data going back almost 60 years to suggest that in that non-recessionary cycle you'd still want to have an allocation there. We have data going back to 1929 in the efficient frontier that would suggest you still need to have that micro-cap allocation to have a more efficient portfolio -- in other words, a portfolio that has less risk and more return.

Q: What is the efficient frontier?

A: It's based on modern portfolio theory, MPT. The efficient frontier is the result of the study of modern portfolio theory.

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