The Opposite of a Cowboy—Nelson on CTSIX’s Calculated Path to 63% 2020 Return and What’s Ahead

Whatever you do, don’t call our small cap portfolio manager—whose fund in 2020 returned 63.27% versus the Russell 2000 Growth’s 34.63% return—a cowboy.

“Diversification drove our return. It wasn’t us being reckless with a sector weight or an individual stock,” says Brandon M. Nelson, Senior Portfolio Manager of Calamos Timpani Small Cap Growth Fund (CTSIX). “Ours is a very calculated, risk-sensitive approach to managing the portfolios. It wasn’t us being cowboys, shooting for the moon, and hoping it went our way. It was us being very calculated in our approach.”

Nelson offers three proof points:

• While the technology sector was a significant source of relative outperformance, it was not the only contributor. CTSIX added value in 10 out of 11 sectors.
• Seventeen holdings each contributed at least 100 basis points of relative outperformance while just two stocks were 100-plus basis point losers. A total of 33 holdings each contributed at least 50 basis points of relative outperformance.
• The fund’s standard deviation is largely in line with the Morningstar category and benchmark average.

These achievements are the result of a process that Nelson simplifies as “we have been good at finding big winners and sticking with them, and we have also been good at damage control and reducing exposure quickly to losing situations.”

CTSIX’s 2020 outperformance started early in 2020 (see this post), well before the small cap rally in the fall. Looking ahead, Nelson is positive on the prospects this year for small caps as a whole and for his fund in particular.

Small caps may be just getting started, based on historical data Nelson cites. When small caps have led, they’ve led big and they’ve led for an extended period of time—an average of 84 months and historically never less than 40 months, according to the Leuthold Group.

The historical performance track record for CTSIX isn’t quite as long but it’s consistent with the theme.

The chart below shows four corrections in the S&P 500 since the fund’s inception, and the table below compares CTSIX’s one-year performance from exactly where we are now—nine months after the bottom—to both the Russell 2000 Growth Index and the S&P 500.

The average return of the previous three corrections is 29.96%, better than the index by 1100 basis points on average. It’s also significantly higher than the S&P 500’s return in those years.

“Investment professionals look at what the fund did in 2020 and wonder if they ‘missed it.’ Well, in the last three times this happened, you wouldn’t have missed it. You would have had another 30% in front of you,” says Nelson. “This is strong outperformance, in absolute and relative terms and, by the way, a lot better than your S&P 500 index fund.”

The chart below is a 10-year look at large cap versus small cap performance. When the line is going up, large stocks are beating the smaller. The opposite is true when the line is going down. Small caps have been winning recently but see how far it is from the baseline, Nelson says. Small caps have some catching up to do.

Finally, while much has been made of small caps’ move late last year, Nelson comments on the valuations of Russell 2000 stocks versus the larger stocks of the Russell 1000.

“Even after November, which was the biggest gain for the Russell 2000 in its existence, and even after December," Nelson notes, "valuations have moved to only the 31st percentile.”

“There’s a long way to go to get back to parity,” he concludes, adding that the fundamentals continue to suggest that the small cap rally is sustainable (see related post).

Investment professionals, for more information about CTSIX and Nelson’s optimism about 2021, contact your Calamos Investment Consultant at 888-571-2567 or caminfo@calamos.com.