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By John Coumarianos | 10-21-2009 01:07 PM

Can Small Caps Continue Their Run?

Morningstar 2008 Manager of the Year Charlie Dreifus says it will probably be more difficult to find reasonably priced small-cap organic growers in the years ahead.

John Coumarianos: Charlie, I wanted to ask you one more question about the markets in general, something we talked about earlier this morning in our meetings.

I know you're a bottoms-up, fundamental-oriented stock-picker, and you don't base most of your decisions on a macroeconomic outlook. But one can't help but notice, when one looks at the markets for the past decade, that although the S&P 500 has declined, cumulatively, 10%, from the beginning of 2000 through a couple of days ago, the Russell 2000 Index has actually gone up 40%, and the Russell 2000 Value Index has gone up over 120%, I think, over that period of time.

Your fund, of course, has outperformed them all, with a 200% cumulative return. But it begs the question... this has been the small-cap decade, it appears--whether small caps can continue to go on this run, especially relative to large caps.

Charles Dreifus: Well, I have my doubts whether small caps as an asset class can continue this. There's usually a cycle, and I am a bottom-up person, but the macro picture seems to suggest that companies that can generate consistent, organic growth, that are multinational, are probably going to benefit a bit more in the years ahead. Clearly, most small caps are not multinational, and it's probably more difficult to find reasonably priced, in any event, organic growers in the small-cap area.

So, if I were to have to say to someone, if you're going to choose an index fund, you want to participate in the U.S. market, I would advise them to not do a small-cap index fund, and perhaps do a large-cap, and perhaps even further a large-cap growth index fund, for the years ahead.

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