Lower quality equities have led the market since Q2 of 2020, when the announcement of vaccine discoveries late in the year boosted their momentum. After a strong Q1 and Q2 for the Russell Mid Cap index = things started to come back to earth in Q3. John Christensen, Senior Portfolio Manager and Analyst for KAR’s Small Cap Core portfolio, notes that, while the market fell, it was still mixed in terms of high vs. low quality, with higher quality doing better, but not by much.
Christensen, however, believes the trend towards higher quality is likely to continue going forward, as short-term pandemic-related boosts expire, and fundamentals and business strength once again become essential to sustain the higher valuations that lower quality names have recently enjoyed.
Key Contributors and Detractors in Mid Cap Core
Listen to the podcast above to learn about the top contributors and detractors in KAR’s Mid Cap Core strategy for Q3 2021.
A Very Different Year
The business climate feels very different than a year ago when we were still in lockdown in most of the country, and the economy was trying to work its way back to normal. Today we’re much closer to that goal as the country continues to get vaccinated. Christensen believes the market has taken this into account with strong returns over the past year.
“As I said before, valuations are being stretched as a result. So, the businesses with higher than usual valuations have high expectations built into them – and some may be able to grow and sustain that – while others with small or no competitive moats may struggle to meet these expectations.”
“Our goal is to buy those businesses that have temporary valuation disconnects so that we can take advantage. We need to have patience and diligence in researching these companies while monitoring our existing holdings for changes in their investment stories. The post-COVID world will look very different in the years to come versus pre-COVID. The opportunity set is promising; we just need to be clear and consistent in our mandate to focus on high-quality businesses.”
This information is being provided by Kayne Anderson Rudnick Investment Management, LLC (“KAR”) for illustrative purposes only. Information contained in this material is not intended by KAR to be interpreted as investment advice, a recommendation or solicitation to purchase securities, or a recommendation of a particular course of action and has not been updated since the date of the material, and KAR does not undertake to update the information presented should it change. This information is based on KAR’s opinions at the time of the recording of this material and are subject to change based on market activity. There is no guarantee that any forecasts made will come to pass. KAR makes no warranty as to the accuracy or reliability of the information contained herein.