July 2015
I. “Active” Small/Mid Cap US Equity (SMID) to Play Rebound in
SMID and Active Managers
US small/mid caps notably underperformed large-cap equities in 2014. The GIC believes 2015 will bring better performance for small/mid caps as the US dollar
strength disproportionately hinders large, multinational company earnings. Investors could gain exposure to the SMID theme via active managers.
Context
Dollar Strength Could Drive Small-Cap Relative Outperformance
• The dollar strengthened by nearly 13% in 2014 as the domestic
economy slowly started to gain momentum
• Small- and mid-cap stocks have offered more fertile ground for
stock picking given their relatively idiosyncratic characteristics
• The GIC expects active manager performance to improve in 2015
as correlations remain relatively low between asset classes and
securities
As of June 30, 2015
100
95
90
85
80
75
70
Investment Thesis
• Margins are not yet at peak levels for SMID companies, offering
more earnings upside potential relative to large caps
• The GIC expects M&A to remain robust in 2015, which should
benefit the valuation of mid-cap companies, in particular
• Recent dollar strength could pressure large-cap company earnings
relative to small/mid caps
• Relative earnings revisions breadth of small caps versus large caps
favors small caps
• Our proprietary active versus passive model suggests that
exposure to active management within small-cap equities could be
beneficial in 2015
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
US Dollar Index
The GIC Believes M&A Will Continue to Accelerate in the US
As of December 31, 2014
$2,000
$1,500
$1,000
$500
$0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
US M&A Transaction Value ($ billions)
Source: Bloomberg, FactSet, Morgan Stanley Wealth Management GIC
Past performance is no guarantee of future results. Estimates of future performance are based on assumptions that may not be realized. This material is not a solicitation of any offer to buy or sell any security or other financial
instrument or to participate in any trading strategy. Please refer to important information, disclosures and qualifications at the end of this material.
GLOBAL INVESTMENT COMMITTEE
Page 1
July 2015
I. “Active” Small/Mid Cap US Equity (SMID) to Play Rebound in
SMID and Active Managers
Investment Ideas
Relative Earnings Revisions Breadth Still Supports Small Caps
• We favor portfolios and securities that are levered toward the US
economic recovery and that have high and growing free cash flow
and return on invested capital
• Our view that the US economy is entering a more mature phase of
recovery suggests that "late-cycle" sectors should outperform
within the US equity market
• We favor energy, financials, health care and technology sectors
• Lower energy prices suggest that consumer-oriented stocks should
also outperform
As of June 30, 2015
10%
5%
0%
-5%
-10%
2010
Key Risks
2011
2012
2013
2014
2015
Russell 2000 Vs. S&P 500 Earnings Revisions Breadth Three-Month Avg.
• A rapid increase in rates could have negative implications for
small- and mid-cap stocks
• Dollar strength reverses, offering a better outlook for large-cap,
multinational corporations
• Fed forward guidance may lead to increased volatility in equity
markets, which could hit higher-beta small caps disproportionately
• A string of disappointing economic data could raise questions
about the strength of the US economic recovery
Source: Russell, FactSet, Morgan Stanley Wealth Management GIC
Past performance is no guarantee of future results. Estimates of future performance are based on assumptions that may not be realized. This material is not a solicitation of any offer to buy or sell any security or other financial
instrument or to participate in any trading strategy. Please refer to important information, disclosures and qualifications at the end of this material.
GLOBAL INVESTMENT COMMITTEE
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July 2015
Index Definitions
RUSSELL 2000 INDEX is comprised of the smallest 2000 companies in the Russell 3000 Index, representing approximately 8% of the Russell 3000 total market capitalization. The index was
developed with a base value of 135.00 as of December 31, 1986.
S&P 500 INDEX Regarded as the best single gauge of the US equities market, this capitalization-weighted index includes a representative sample of 500 leading companies in leading
industries of the US economy.
U.S. DOLLAR INDEX (USDX) indicates the general int'l value of the USD. The USDX does this by averaging the exchange rates between the USD and major world currencies.
Risk Considerations
International investing entails greater risk, as well as greater potential rewards compared to U.S. investing. These risks include political and economic uncertainties of foreign countries as
well as the risk of currency fluctuations. These risks are magnified in countries with emerging markets, since these countries may have relatively unstable governments and less established
markets and economies.
Equity securities may fluctuate in response to news on companies, industries, market conditions and general economic environment.
Investing in small- to medium-sized companies entails special risks, such as limited product lines, markets and financial resources, and greater volatility than securities of larger, more
established companies.
Because of their narrow focus, sector investments tend to be more volatile than investments that diversify across many sectors and companies.
Investing in foreign emerging markets entails greater risks than those normally associated with domestic markets, such as political, currency, economic and market risks.
Disclosures
Morgan Stanley Wealth Management is the trade name of Morgan Stanley Smith Barney LLC, a registered broker-dealer in the United States. This material has been prepared for
informational purposes only and is not an offer to buy or sell or a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. Past
performance is not necessarily a guide to future performance.
The securities/instruments discussed in this material may not be suitable for all investors. The appropriateness of a particular investment or strategy will depend on an investor’s individual
circumstances and objectives. Morgan Stanley Wealth Management recommends that investors independently evaluate specific investments and strategies, and encourages investors to
seek the advice of a financial advisor.
This material is based on public information as of the specified date, and may be stale thereafter. We have no obligation to tell you when information herein may change. We and our thirdparty data providers make no representation or warranty with respect to the accuracy or completeness of this material. Past performance is no guarantee of future results.
This material should not be viewed as advice or recommendations with respect to asset allocation or any particular investment. This information is not intended to, and should not, form a
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The indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment.
The indices selected by Morgan Stanley Wealth Management to measure performance are representative of broad asset classes. Morgan Stanley Smith Barney LLC retains the right to
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© 2015 Morgan Stanley Smith Barney LLC. Member SIPC.
Past performance is no guarantee of future results. Estimates of future performance are based on assumptions that may not be realized. This material is not a solicitation of any offer to buy or sell any security or other financial
instrument or to participate in any trading strategy. Please refer to important information, disclosures and qualifications at the end of this material.
GLOBAL INVESTMENT COMMITTEE
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