Small cap stocks: Brighter days ahead?
Institutional Investment Consulting and Fiduciary Services Insights July 2024
A long-held tenet of investing is that small market capitalization stocks (small cap stocks) should produce a return premium relative to those with large market capitalizations (large cap stocks) over time.1 Traditionally, this assumption was predicated on the expected higher growth potential, greater risk and lesser liquidity of small cap stocks compared to their large cap brethren and was also supported by a historical pattern of small caps’ outperformance versus large caps over extended periods.2
Yet, in recent years, small cap stocks have frustrated investors with underwhelming performance relative to large caps, calling into question whether a small cap return premium still exists that would support an allocation to the asset class. In this whitepaper, we examine the historical record of small cap stocks’ performance relative to large caps and reasons for the recent small cap performance shortfall, and discuss factors that may lead to the reversal of this performance gap.
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