Small-cap stocks as an asset class have long since lost academic approval, but they could still be a good investment for years to come.
This so-called small-cap effect (where the average small-cap stock outperforms the market) Doctoral dissertation by Rolf Banz at the University of Chicago, late 1970s.. Vans studied stock performance from 1936 to 1975 and found that “common stocks of small companies had, on average, higher risk-adjusted returns than common stocks of large companies.”
However, this pattern documented by Banz did not hold up outside the sample. In the 40 years since the Vans study was published, small-cap stocks have, on average, significantly lagged the market. moreover, According to recent researchthe small-cap effect did not exist for decades prior to the sample Banz focused on, in fact as far back as 1866.
Many financial experts conclude from this and other research that there is no reason to favor small-cap stocks over large-cap stocks. While certain small-cap stocks may be attractive, the asset class itself is not.
But Guido Baltussen of Erasmus University in the Netherlands says that conclusion is premature. Baltussen is a co-author of a recent study that found the absence of scale effects over the entire period going back to 1866. Baltussen said in an email that the small-cap effect has not existed for the past 158 years, even though the small-cap effect was not significant going back to 1866. There has been a long period in recent years where small-cap stocks outperformed large-cap stocks.
Moreover, these periods of outperformance are “somewhat predictable.” One such era seems to be starting now. A recent study from Northern Trust Asset Management, co-authored by Baltussen, portfolio manager Abhishek Gupta, and researcher Daniel Huang, found that current market conditions and market conditions that have led small-cap stocks to outperform in the past. It became clear that there were three similarities between the two. Up to 10 years. ”
