The third quarter of 2024 saw a notable shift in market dynamics, with small-cap stocks gaining momentum as interest rates began to decline. The Ironwood Small Cap Core Strategy Q3 2024 (SCC) strategy demonstrated resilience and strategic adaptability amid significant market changes. The third quarter marked a notable shift as institutional investors began rotating from large-cap to small-cap and value stocks. This shift in investment dynamics aligned with the SCC strategy’s focus, setting the stage for promising outcomes in the coming months.
Performance of the Ironwood Small Cap Core Strategy Q3 2024 and Market Position
During Q3, the Ironwood Small Cap Core Strategy Q3 2024 (SCC strategy) delivered a gross return of 6%. While Q3 performance slightly trailed the benchmark Russell 2000 index, the strategy maintained its strong year-to-date return of 19% gross, surpassing the Russell 2000 by nearly 800 basis points. Over the long term, Ironwood’s SCC strategy has outperformed since its inception in 1999, delivering over 360 basis points gross of alpha per year versus the Russell 2000. Through the most recent data at the end of Q2, the Ironwood SCC ranked #1 in the Nasdaq eVestment Database US Small Cap Core Equity Universe for 1H 2024, solidifying its rank in the top quartile among peers in the Small Cap Core universe.
Capitalizing on Market Rotation
Q3 saw a pivot towards interest-rate-sensitive industries, which emerged as strong performers due to recent interest rate cuts. The best-performing sectors included real estate, financials (particularly regional banks), and utilities, all of which experienced gains as borrowing costs declined. This rotation, termed the “Great Rotation” by industry analysts, highlights a trend toward the small-cap market—a shift that aligns well with Ironwood’s established focus on high-quality, undervalued companies poised to benefit from an improving economic environment. This market dynamic provides a strong industry tailwind going into Q4 and 2025. See more of our content on the Great Rotation and the historical track record of Small Cap outperformance in declining rate environments.
M&A Accelerates
One of the most significant developments in Q3 was accelerating M&A activity within the portfolio. Three portfolio holdings were acquired in the first three quarters of 2024, and there are an additional five current holdings that have received takeover bids. This surge in M&A activity can be attributed to several factors, including elevated stock market valuations making sales attractive, private equity funds flush with capital that needs to be deployed, and management teams seeking exits after years of challenging market conditions.
Outlook and Focus
Looking ahead, the outlook for small-cap earnings appears promising. After a modest increase in 2024, Russell 2000 earnings are projected to grow by 36% in 2025. Additionally, small-cap stocks are trading near historical average forward P/E ratios, while the S&P 500 remains significantly above average estimated P/E ratios, suggesting potential room for continued small-cap outperformance.
With inflation easing and additional rate cuts anticipated, Ironwood anticipates continued potential opportunities within small-cap sectors. The SCC strategy remains committed to identifying high-potential investments in companies with durable business models and capable management teams. Read more about our investment philosophy here. Ironwood’s approach, grounded in rigorous research and long-term perspective, enables it to capture market inefficiencies and drive returns within the small-cap space. As the Great Rotation progresses, the SCC strategy is well-positioned to benefit from these macroeconomic tailwinds, reinforcing Ironwood’s dedication to delivering returns and value for investors over the long term.
Partner with Ironwood for Success with your Small Cap Core Strategy
As small-cap stocks gain traction amidst shifting market conditions, Ironwood Investment Management LLC is uniquely positioned to help investors capitalize on emerging opportunities. With a proven track record through its Small Cap Core strategy, Ironwood’s approach is grounded in rigorous research and high-conviction investments. Our dedicated team identifies undervalued companies with strong potential returns, ensuring that portfolios are well-positioned to benefit from the evolving economic landscape.
Stay ahead of market trends and make informed investment decisions with Ironwood. Schedule a consultation with our investment team today to learn more about how our Small Cap Core strategy can fit your portfolio.
PERFORMANCE DATA AND DISCLOSURES
Performance Statistics as of 9/30/2024
Ironwood Investment Management®, LLC (Ironwood) is an independently managed investment advisory firm providing investment advisory services to institutional clients, mutual funds and high-net-worth clients. The firm is a registered investment adviser with the Securities and Exchange Commission. SEC Registration does not imply a certain level of skill or training. Accounts in the Small Cap Core composite include separately managed, fully discretionary, fee-paying portfolios. Portfolios are invested in undervalued securities, the majority of which will have market capitalizations under $2.5 billion at cost, including securities with growth and/or value characteristics. Securities are considered undervalued when management believes the current share price does not accurately reflect the long-term economic value of the underlying company. Ironwood Investment Management, LLC claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS standards. Ironwood Investment Management, LLC has been independently verified for the periods January 1, 1999 through December 31, 2021. A firm that claims compliance with the GIPS standards must establish policies and procedures for complying with all the applicable requirements of the GIPS standards. Verification provides assurance on whether the firm’s policies and procedures related to composite and pooled fund maintenance, as well as the calculation, presentation, and distribution of performance, have been designed in compliance with the GIPS standards and have been implemented on a firm-wide basis. The Small Cap Core composite has had a performance examination for the periods July 1, 2002 to December 31, 2021. The verification and performance examination reports are available upon request. GIPS® is a registered trademark of CFA Institute. CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein. The creation date of the composite: July 2002. Performance inception date of the composite: January 1, 1999. Prior to July 2002, portfolios were included in the composite when at least 75% of the portfolio was invested in equity securities and when at least 75% of the portfolio was invested according to the investment style of the composite. Subsequent to July, 2002, portfolios are included in the composite after the first full month of being fully invested. Returns are presented gross and net of management fees and include the reinvestment of all income. Net returns are calculated based on the highest fee of 1.00%. Investment management fees are 1.00% on the first $25 million, 0.90% on the next $25 million, 0.80% on the next $50 million, and 0.75% over $100 million on an annual basis and a client’s return will be reduced by these and other related expenses. The actual fee charged to an individual portfolio may vary by size and type of portfolio and may be negotiated. Actual investment advisory fees incurred by clients may vary. The Russell 2000 Index consists of the 2000 smallest stocks in the Russell 3000 Index that represents approximately 8% of the U.S. equity market capitalization. The indices have been reconstituted annually since 1989. Ironwood returns and Index performance reflect reinvested interest income and dividends, in U.S. dollars. A list of composite descriptions and a list of limited distribution pooled fund descriptions are available upon request. Past performance is not indicative of future results. Policies for valuing investments, calculating performance and preparing GIPS Reports are available upon request. Prior to May 2006, the Firm was known as Ironwood Capital Management, LLC.