Global small-cap stocks have struggled relative to their large-cap peers. As recession fears have been building over the last few months, investors have rotated out of small caps into defensive large-cap names to provide shelter during the market selloff. Despite inexpensive valuations, strong balance sheets and attractive dividend yields, small-cap stocks in Canada and the U.S. remain unloved by investors.
We believe that patient small-cap investors will be rewarded over the long term, given we are still only in the second year of the economic expansion. The Fund remains well diversified and positioned for a rising interest rate environment. Its largest sector weights are Financials, Industrials and Materials, which contain companies that benefit from higher rates and have the pricing power to increase margins in this new environment.
The catalyst for small-cap stocks will be inflation peaking, as investors may rotate back into the sector. Meanwhile, Matco Small Fund investors get paid to wait with a dividend yield of over 5.2%.