Just 10 US behemoths now account for a fifth of the MSCI All Country World Index, the highest concentration in decades. Across much of the world, large companies have left smaller peers in the dust. Is the notion that minnows outperform — known as the small-cap premium — dead or merely resting?
The outsize returns of small companies relative to larger peers was documented in the early 1980s using evidence from the half-century to 1975. The idea found theoretical support. Higher returns compensate investors for taking on the greater risk of backing smaller, younger companies — though that can be minimised in a diversified portfolio. More importantly, they recompense investors for elevated spreads, higher trading expenses and supervision costs.
