Small cap performance has been a topic of interest lately, with many experts questioning the small cap premium. Over the past decade, the Russell 2000® Index has consistently lagged behind the S&P 500® Index and the Nasdaq 100 Index by significant margins.
There are various theories on why this shift has occurred and what the future holds for small cap stocks. Some attribute it to the rise of private equity firms keeping companies private for extended periods, while others point to regulatory changes and mega-cap tech companies acquiring potential small cap firms before they go public. The question remains: are small caps on a permanent decline, and how should long-term equity investors approach their small cap allocations?
In this article, we will delve deeper into the small cap premium, analyze the reasons behind small cap struggles, revisit Russell Investments’ stance on small cap stocks, and provide insights on navigating the small cap landscape.
The Fama/French Three Factor Model introduced in the early 1990s highlighted the Small Minus Big (SMB) factor, demonstrating a historical return premium for small cap stocks over large cap stocks. While the small cap premium has fluctuated over the years, recent data suggests a downturn in small cap performance, raising concerns for investors.
Factors such as migration of small cap stocks to large cap status, known as the “listing gap,” and increased M&A activity by tech giants have contributed to the challenges faced by small cap stocks. However, emerging trends like growing regulatory scrutiny and the rise of AI present opportunities for smaller firms to thrive in the market.
Russell Investments believes in the long-term advantages of investing in smaller-cap stocks through active management strategies. While passive allocations may be subject to volatility and underperformance, skilled active managers can capitalize on the opportunities presented by small cap stocks.
In conclusion, allocating to small cap equities remains a viable option for investors, especially considering the cyclical nature of small cap performance and the potential for future outperformance. Active management and global diversification can further enhance the prospects for small cap investments, offering a balanced approach to navigating the evolving small cap landscape.
DailyBubble’s perspective aligns with the belief that small cap stocks hold potential for investors willing to undertake active management strategies and explore opportunities beyond the U.S. market. By staying informed and adapting to market trends, investors can position themselves for success in the dynamic world of small cap investments.