In the ten-year period ending 12/31/18, publicly held large cap stocks outperformed small cap stocks, rising an average of 13.3% versus 12.0% (FTSE Russell, 2019). Large cap stocks are generally defined as companies with a value greater than $10 Billion while small cap stocks are generally valued at less than $2 Billion, with “mid-cap” stocks in between. As a result, some investment pundits are calling for clients to abandon small cap stocks altogether and there is a great deal of speculation surrounding this trend.
Studies indicate that over the past thirty years, big companies have been growing quicker than small companies, measured by job growth. Juliane Begenau, a Stanford professor, believes that a key reason for this shift is big data. Big firms often produce big data (e.g. Amazon) and were leaders in data analysis and the ability to analyze and present this data, which has reduced uncertainty around these large firms. Investors are willing to pay a premium to invest in companies with less uncertainty, reflected in higher stock prices for such larger companies.
Privately held companies are staying private longer; while they typically went public in four years back in 1999, they are now averaging eleven years. Many factors go into this trend. The 2012 JOBS (Jumpstart our Business Startups) law quadrupled the maximum number of shareholders to 400 allowed before a firm must disclose financial statements. This burden of reporting requirements is a big concern for private companies considering “going public”. With smaller companies staying private longer, ordinary investors have less of a chance to participate in their growth. The increased use of later stage IPOs has likely eliminated some of the upside for publicly traded small-cap companies.
When the historic data is looked at closely over longer periods, it is apparent that both large cap and small cap stocks have their periods of out-performance. In two of past four decades, small cap has outperformed large cap; in the other two decades, large cap outperformed. Over the past forty years, large cap has only outperformed small cap on average by 40 basis points, hardly enough to justify a U.S. stock portfolio concentrated solely in large cap. As big data and its analysis trickles down through the economy to smaller companies, this currently perceived edge may erode. In addition, the conditions that have allowed for technology companies to stay private longer may not continue in future decades (e.g. SEC trimmed public company disclosure rules in May 2019). As a result, we continue to recom-mend that clients include a meaningful allocation to both small cap and large cap stocks going forward.