With this week’s official dawning of the Trump Era part deux, there’s plenty of conjecture about the impact on local and global economies and stock markets. Trump’s first White House stint showed that what Donald says and what Donald does can be quite different, but Monday’s first-day flood of executive orders shows he means business. While the commentary centres on large tech stocks, cryptocurrencies and ‘drill baby drill’ explorers, Australian fund Savana Asset Management suggests US small caps as the ideal way to surf the business-friendly Trump Wave.
Small-cap US value stocks surged 5.27% the day after Trump’s election victory – the highest gain for any sector. Likely tailwinds include tax cuts, deregulation and – arguably – lower interest rates.
“Generally, small caps are more sensitive to changes in economic conditions and economic policies,” Savana’s associate director Samuel Atkinson says.
In a case of serendipitous timing Savana last November launched its US Small Caps Active Exchange Traded Fund (ASX code: SVNP), to trawl for hidden gems among thousands of New York and Nasdaq-listed small caps. Atkinson points to a gaping valuation gap between the small and big caps, with the former trading on an average earnings multiple of 15 times compared with 22 times for the latter. The Trump Effect aside, small caps have outperformed their larger brethren by an 2.85% a year on average since 1927. This week, Trump announced a $US500 billion fund, Stargate, to keep artificial intelligence in America.
Aptly, Savana’s fund decisions are made entirely by algorithms, which remove the subjective biases afflicting humanoid investors (such as whether they love or loathe Trump). The computers are loaded with basic data on every investible company – those above the firm’s minimum cut-off of a US$500 million market cap – and the algos take it from there.
“Whereas humans are subject to myriad cognitive and emotional biases in their decision-making, our algorithms are disciplined and fearless, ensuring unmatched precision in capitalising on mispriced assets,” Atkinson says.
Quirkily, the fund was not intended to be confined to the small caps – but that’s where the algos sniffed the best value. The ETF will invest in any sector and – like Trump himself – is not weighed down by ESG mandates (yep, ‘naughty’ companies are allowed). The fund currently has an initial $3.9 million across 30 investments, which can be expanded to 50.
Ahead of the launch, the firm tested out the algos with hypothetical paper trading over two years. The exercise achieved an annualised total return of 42% – 25% outperformance relative to the benchmark S&P total return index. The ‘real’ fund had early success with the quixotic Nebius, a Russian data centre and chip design company that re-domiciled to the Netherlands and listed on the Nasdaq. The fund invested in Nebius in early November last year, but flipped the stake in early January for a 61% gain after the algos “ruthlessly” deemed the shares as overcooked.
One potential spoiler is the prospect of Trump’s policies (notably tax cuts and tariffs) fuelling inflation, resulting in the need for higher interest rates. Small caps tend to be highly geared, or their valuation is based on inflation-adjusted assumptions of future earnings. Atkinson notes that Trump claimed his first term was a success because his favoured barometer – the stock market – fared well (as it did in the Biden era, just sayin’).
“Trump will be reluctant to impose any policies that are going to compromise the viability of the stock market,” he says.
This means that if tariffs spark inflation, even Trump’s signature policy will be watered down. Given Savana’s machine-driven approach is scaleable and replicable, the firm plans to launch local and global small cap ETFs later this year.
By Tim Boreham
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