Add Value to Plans with Small-Cap Growth Funds

Small-cap growth funds represent a potentially effective way for those with retirement saving shortfalls and concerns about improving portfolio growth to provide additional stock and sector diversification while adding only moderate volatility, according to a white paper issued by institutional asset management firm RidgeWorth Investments. The report, “The Overlooked Potential of Small Cap Growth Funds: The importance of growth investing in retirement plan portfolios,” makes the case for adding small-cap growth funds as a relatively safe method for many Americans to catch up on lagging retirement savings goals.  

Report researchers pointed to recent figures released by the U.S. Department of Labor (DOL) showing the average retiree will need as much as 85% of preretirement income to sustain his or her current lifestyle. According to the white paper, Americans have far too little saved to meet those needs, and what savings they do have are allocated too conservatively to make recovering the shortfall possible. 

Chris Guinther, senior portfolio manager of the RidgeWorth Small Cap Growth Stock Fund stressed that, despite high volatility typically associated with small-cap growth funds, they have historically offered the greatest capital appreciation over the long run. “Small-cap companies tend to grow faster than their midsize and large counterparts because they have more potential for rapid revenue and earnings growth due to innovative products and services,” Guinther said. “The inclusion of small-cap equity in a retirement portfolio may provide more opportunity to capture the upside of the equity markets, especially when those investors stick with a consistent allocation over time.”

Guinther’s recommendations are supported by recent market activity. Over the past few years, money has flowed toward dividend-oriented value stocks and away from small caps, but, during the first half of this year, the small-cap sector experienced stronger inflows, suggesting a return to a longer-term trend favoring this asset class.

A copy of the white paper is available here.