A study in the US has found that high transaction costs used with small cap stocks along with forecasted returns are not predicted to overtake those of big cap stocks, making the asset class rather unattractive.
The study, carried out by BNY Mellon Beta Management (BNY), found that the estimated returns for small cap and large cap stocks in the US and other worldwide markets through the evaluation of the current price of individual securities, consensus earnings expectations and the growth rate of gross domestic product (GDP) over the long term.
Taking the findings of global small cap stocks into account, the report acknowledged that expectations are lower than they are for global large caps.
Mark Keleher, CEO from BNY said: “In the U.S., we believe the expected returns premium for small caps is zero when compared with large cap stocks. This means that an investor would not receive excess compensation for investing in a less liquid market.
The last time this occurred was in March 1983. The large-cap Russell 1000 outperformed the small-cap Russell 2000 in terms of price appreciation by an average of 48 basis points annually over the subsequent 27 years according to the study.”
However, Mr Keleher added that the findings do not mean that small caps are always a bad investment. He added: “There tend to be periods where small caps outperform, but this does not appear to be one of them. Small caps in developed global markets did particularly well in the 12 months ended May 31, 2010, when they out-performed global large caps by over 15 percent. However, our study indicates the optimum time to invest in small caps may have passed.”
ACQ Magazine