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Since late November, we have been positive on small cap stocks as an economic recovery play. Eight months later, this investment thesis has continued to pay off for long-term investors. Year-to-date, small cap stocks globally have significantly outperformed their large cap peers.

Our thesis for small cap outperformance was and continues to be based on the following:

  • We are at the start of a long-term economic cycle.
    • A combination of low-interest rates, government spending and pent-up consumer demand has led to a strong economic recovery that should last for years.
    • A reminder that after the 2008-2009 Great Recession, the global stock markets experienced their longest bull market ever, at approximately 11 years. Although there were the eventual ‘bumps in the road’ for investors during this time, as markets went through corrective phases, the long-term trend was up. The after COVID global economic recovery is so far following the same pattern, with ultra-low interest rates globally, government spending and strong consumer demand resulting in a global inventory restocking cycle.
  • Small Cap companies have more leverage to an economic recovery.
    • Small cap companies typically have more revenue exposure to the domestic economy, therefore they were the hardest hit during the national lockdowns. As a result, we expected their profit margins to bounce back stronger on a recovery, as COVID restrictions started to ease.
    • Rising profits margins mean investors that are seeking capital appreciation will pay a higher price for these stocks for their long-term growth potential.
  • Valuation discount relative to large cap companies
    • Since March 2020, small cap companies have been trading at a significant discount to their large cap peers, as investors fled to the safety of larger companies to weather the economic uncertainty caused by COVID.
    • Although this discount has narrowed, many high-quality companies in our Fund are trading at a discount, with better investment characteristics and earnings growth prospects than large cap companies.
  • Historical Evidence
    • Using U.S. small cap performance data since 1925, we know that small cap stocks have an outperform cycle relative to large cap companies. As shown on the chart below, when the blue line is increasing small cap stocks are outperforming.

U.S. Small Caps Relative to Large Caps Since 1925 (TR)

Performance based on ibbotson SC TR index from 1925 to 1978 and Russell 2000 (TR) thereafter. Source: Scotiabank GBM Portfolio Strategy, Morning star, Shiler

    • Since 1925, there have been five cycles of outperformance, lasting from 6 to 20 years, with an average of 11 years and a median of 10 years. Given that every economic cycle is slightly different based on economic and political factors at that time, we cannot automatically assume that outperformance will last 10-11 years this time, however, we can with a high degree of confidence believe that a minimum of 6 years is possible.
  • The Bottom Line
    • We believe investors should have exposure to small cap stocks in their portfolios as part of their overall asset mix. The Matco Small Cap Fund year-to-date as of June 22nd is up 16% and up 45% over the last year.
    • The Fund is trading at a significant valuation discount relative to large cap companies, has a higher dividend yield at 4% than market indices and has better earnings growth prospects.

If you are not sure about how much exposure you should have to small cap stocks or would like more information about the Matco Small Cap Fund, please reach out to me.


Click here to email Anil   Buy our MATCO Mutual Funds today 

Anil Tahiliani, CFA, MBA
Vice President & Portfolio Manager
Local: +1-403-539-5085

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Founded in 2006 to manage and service seven family offices, today Matco offers the benefits of our extensive investment management experience to individual investors, foundations, endowments, condominium corporations, trusts, corporations and not-for-profit organizations.

Our mission is to simplify the investment world for our clients by understanding their needs and providing exceptional investment solutions that preserve and grow capital.

Matco Financial is an independent, privately held discretionary investment counsellor and asset management firm that serves the needs of individual investors, institutions, advisors, trusts, corporations and not-for-profit organizations. Matco provides investment advisory services to investors on a discretionary basis through mutual funds and separately managed accounts. This communication is intended for information purposes only and does not constitute an offer or solicitation by anyone in any jurisdiction in which such an offer or solicitation is not authorized or to any person to whom it is unlawful to make such an offer or solicitation. Matco Financial Inc. makes no representations as to the accuracy or any other aspect of information contained in other websites. All statements that look forward in time or include anything other than historical information are subject to risks and uncertainties and are not guarantees of future performance. Investors should not rely on forward-looking statements. Actual results, actions or events, could differ materially from those set forth in the forward-looking statements.

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