WhatsImpactingSmallMidCap TROW 2011

7/31/2019 WhatsImpactingSmallMidCap TROW 2011

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What's ImpactingSmall-/Mid-Cap Investing?

Gregory McCrickard

Heather McPherson

David Wagner

David Wallack

Brian Dausch (moderator)


2/20

BRIAN C. DAUSCH, CFA

14 years of investment experience,

13 with T. Rowe Price

Portfolio specialist in the Equity Division

of T. Rowe Price since 2007

portfolio specialist


3/20


4/20

GREGORY A. MCCRICKARD,

CFA

27 years of investment experience,25 with T. Rowe Price

Portfolio manager of the Small-Cap Core

Strategy since 1992

portfolio manager


5/20

DAVID J. WALLACK



Portfolio manager of the Mid-Cap Value

Strategy since 2000

portfolio manager


6/20

HEATHER K. MCPHERSON



Associate portfolio manager of the

Mid-Cap Value Strategy since 2005

portfolio manager


7/20

7

Agenda

Why do small- and mid-caps make sense in adiversified portfolio?

Outlook for small- and mid-caps relative tolarge-caps is mixed

Valuations

Fundamentals Performance cycles

Trends and opportunities

IPO and M&A activity Growth vs. value

Pockets of opportunity


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8

Small- and Mid-Caps Have Outperformed,but Performance Comes in Cycles

U.S. Small-Cap

Equities

U.S. Mid-Cap

Equities

U.S. Large-Cap

Equities

Precious Metals Corporate

Bonds

Cash

Returns

Standard Deviation

Annualized Asset Class Returns and Standard Deviation Since 19261

90

110

130

150

170

190

'50 '54 '58 '62 '66 '70 '74 '78 '82 '86 '90 '94 '98 '02 '06 '10

Recessions

Small-Cap/Large-Cap Relative Strength

1Precious Metals Returns only since 1947.

All returns are annualized returns from 1926-September 30, 2011, except Precious Metals, which is from 1947-September 30, 2011. Equity returns based onCenter for Research in Security Prices, University of Chicago Data, Large: Decile 1, Mid: Decile 2 and 3, Small: Decile 4 and 5. Precious Metals Returns basedon CRB CCI Precious Metals Index. Bonds based on U.S. IT Government Index from 1926-1972, Lehman Bros. Government Corporate Index from 1973-1975,Barclays Cap. U.S. Aggregate Index from 1976-September 30, 2011. Cash based on 30-day T-bill yield.

Sources: CRSP Center for Research in Securities Prices-Graduate School of Business, University of Chicago, T. Rowe Price, The Leuthold Group October 2011Past performance cannot guarantee future results.These charts are shown for illustrative purposes only and do not represent the performance of any specific security. Unlike U.S. Treasuries and corporate bonds,stocks are not guaranteed as to the timely payment of interest and principal.

Relative Performance of Small-Caps Versus Large-Caps

Small-CapsOutperform

Small-CapsUnderperform

As of 30 September 2011

30%

24

18

12

6

0


9/20

9

21.1

10.3

12.6

2.2

0.7

0.6

2.1

3.1

1.3

0 5 10 15 20 25 30 35

MSCI World Index

S&P 500 Index

Russell 3000 Index

Russell 2500 Index

CAC 40 Index

DAX Index

TOPIX

FTSE 100 Index

MSCI EM Index

Trillions

1

Small- and Mid-Caps Make Up a Large Partof the Worlds Investable Universe

World IndicesMarket CapitalizationTotal Market Value (U.S. $ Trillions)

30 September 2011

Emerging Markets

Various Developed Markets

World Market

$

U.S.


10/20

10

14

84

21

0

5

10

15

20

25

Large Mid Small MicroMerrill Lynch Size Composites

AverageN

umberof

Sell-Side

Analysts

Small- and Mid-Caps Are OftenUnderfollowed, Which Creates Opportunity

Sources: FactSet, Merrill Lynch Small-Cap ResearchReprinted by permission. Copyright 2011 Merrill Lynch, Pierce, Fenner & Smith Incorporated. The use of the above in no way implies that Merrill Lynchendorses the views or interpretation or the use of such information or acts as any endorsement of T. Rowe Price use of such information. The informationis provided as is, and Merrill Lynch does not warrant the accuracy or completeness of the information.

30 September 2011

Average Number of Sell-Side Analysts Covering a Stock by Size

Market-CapBucket($Millions)

Number of Companies

Total Market Value ($ Billions) of All Companies in Market-Cap Bucket

0 500 1,000 1,500 2,000 2,500 3,000

$0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000

LargestOver 10,000

Mid1,000-10,000

Smallest

0-1,000

11,000

Number of Companies

Market-Cap


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11

Small-Cap Relative Valuations Do NotLook Cheap

The New Horizons Fund relative P/E compared to thelarge-cap-dominated S&P 500 is at a 25-year high.

New Horizons Fund Relative P/E

P/E Ratio of the Fund's Portfolio Securities relative to the S&P 500 P/E Ratio

The funds P/E ratio is an average, unweighted number based on 12-month forward earnings per share as estimated by the funds investment manager ateach quarter-end. The funds P/E ratio is representative of small cap stock valuations and is shown for illustrative purposes only. This is not intended tobe an offer of the New Horizons Fund.

0.0

0.5

1.0

1.5

2.0

2.5

196

1

1967

197

3

197

9

1985

199

1

1997

200

3

200

9

201

1



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12

Is Small-Cap Earnings Momentum Shifting?

Small-cap earnings growth has decelerated. Large- andmid-cap earnings momentum has slowed, but not as much.

31.424.727.020.217.3Bottom 2,000

31.523.124.922.317.3Small-Cap (Next 1,200)

Median Year-Over-Year Operating Earning Momentum

27.5

22.3

18.7

13.6%

Q3 2010

31.1

24.1

18.6

18.0%

Q4 2010

30.715.312.7Micro-Cap (Last 600)

30.922.224.3Mid-Cap (Next 900)

23.0

14.4%

Q2 2010

18.9

18.0%

Q1 2011

Large-Cap (Top 300)

Mega-Caps (Top 50)

18.7

17.2%

Q2 2011


Median Operating Earning MomentumLargest 3,000 Companies

Source: The Leuthold Group, October 2011


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13 Source: The Leuthold Group, October 2011

If we are heading for an economic recession, we are likely tosee more turbulence. Non-economic recessions have beenmuch shorter lived, which could signify that an upturn is on

the horizon.

What Does a Bear Market Tell Us?

30 September 2011

Economic Versus Non-Economic Bear MarketsDow Jones Industrials, 1899 to Present

Non-economic bear markets have been much shorter thanrecession-induced ones, but they have inflicted almost as much damage.

5.0-16.83 October 201129 April 2011Latest Decline (DJIA)

5.0-29.13 October 201129 April 2011Russell 2000

1945 to Date

1899 to Date

1945 to Date

1899 to Date

Date of Low

Medians:

Medians:

6.0-26.9

6.5-27.1Non-Economic Bear Markets

(Market Decline NotAssociated With U.S.

Recession)

18.1

21.9

Duration(Months)

-30.0

-36.9%

Pct.Decline

Economic Bear Markets(Decline Occurring Prior to or

During U.S. Recession)

Date of High


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14

IPO Market Has Been Relatively Quiet

Sources: Securities Data Corp., FactSet Research Systems, BofA Merrill Lynch Small-Cap Research

30 September 2011

0

5,000

10,000

15,000

20,000

25,000

30,000

3Q95 3Q97 3Q99 3Q01 3Q03 3Q05 3Q07 3Q09 3Q11Procee

ds

(inm

illionso

f$)

0

50100

150

200

250

300

3Q95 3Q97 3Q99 3Q01 3Q03 3Q05 3Q07 3Q09 3Q11

Num

berofIPOs

IPO Market Trends Proceeds

IPO Market Trends Number


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15

Small-Cap Cycle: Value vs. Growth

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.004.50

Dec-78

Dec-81

Dec-84

Dec-87

Dec-90

Dec-93

Dec-96

Dec-99

Dec-02

Dec-05

Dec-08

Sep-11

As of 30 July 2011

Performance of Russell 2000 Value VersusRussell 2000 Growth

Past performance cannot guarantee future results.

Sources: Russell Investment Group, BofAML Small-Cap ResearchIt is not possible to invest directly in an index.These charts are shown for illustrative purposes only and do not represent the performance of any specific security.


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16

Mid-Caps Have Enjoyed Strong RelativePerformance

Past performance cannot guarantee future results.

Source: T. Rowe PriceIt is not possible to invest directly in an index.These charts are shown for illustrative purposes only and do not represent the performance of any specific security.

30 September 2011

Performance Comparison: Russell Mid-Cap IndexVersus S&P 500

0

200

400

600

8001,000

1,200

1,400

1,600

1,800

2,000

Dec-85

Dec-87

Dec-89

Dec-91

Dec-93

Dec-95

Dec-97

Dec-99

Dec-01

Dec-03

Dec-05

Dec-07

Dec-09

Index

Leve

l

Russell Mid-Cap Index S&P 500

Sept-11


17/20

17

0.40

0.60

0.80

1.00

1.20

1.40

12/31/78 12/31/83 12/31/88 12/31/93 12/31/98 12/31/03 12/31/08

0.40

0.60

0.80

1.00

1.20

1.40

12/31/78 12/31/83 12/31/88 12/31/93 12/31/98 12/31/03 12/31/08

The Mid-Cap Average Is, at Best, ValuedComparably to Large-Caps

Source: T. Rowe Price

30 September 2011

EV/Sales

Russell Mid-Cap vs. Russell Large-Cap

Trailing 12-m P/E

Average

Average


18/20

18

0.60

0.80

1.00

1.20

1.40

1.60

1.80

12/31/78 12/31/83 12/31/88 12/31/93 12/31/98 12/31/03 12/31/08

Russell Mid-Cap vs. Russell Large-Cap

The Mid-Cap Average Is, at Best, ValuedComparably to Large-Caps

Price/Book

Dividend Yield

Source: T. Rowe Price

30 September 2011

0.40

0.60

0.80

1.00

1.20

1.40

12/31/78 12/31/83 12/31/88 12/31/93 12/31/98 12/31/03 12/31/08

Average

Average


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19

Mid-Cap Value Versus Mid-Cap Growth Performance

Growth has Been Outperforming ValueAmong Mid-Caps

Past performance cannot guarantee future results.Source: The Leuthold Group, October 2011These charts are shown for illustrative purposes only and do not represent the performance of any specific security.


0

20

40

60

80

100

120

140

160

Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11

IndexLevel

118

120

122

124

126

128

130

132

134

Sep-09 Mar-10 Sep-10 Mar-11 Sep-11

IndexLevel

Value

Growth

Growth

Growth


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20

Is Cash the Next Catalyst for M&A Growth?

1 Largest 1,500 stocks, excluding financials, utilities, and autos. Data smoothed on a trailing twelve-month basis.Sources: MergerStat, Corporate Reports, Empirical Research Partners Analysis, FactSet, JP Morgan.

0

200

400

600

8001,000

1,200

1,400

1,600

68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

Vo

lumeo

fU.S

.M&A

Transactions

0

2

4

68

10

12

Cas

han

dEqu

iva

len

ts

asa

Shareo

fB

alance

Shee

tAsse

ts1Cash M&A Deal Volume

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Current

Debt as Percentage of Total Assets (S&P 500)

The average is 32.9%

38%

36

34

32

30

28

26

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WhatsImpactingSmallMidCap TROW 2011

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