Small in size but not in strength
Over the long term, small caps perform better than large firms on the stock market. We take a closer look...
By Bertrand Beauté
The performance of stock market giants such as Apple, Tesla or Nestlé is under constant surveillance by the business press and financial analysts. In contrast, thousands of smaller companies, referred to as small caps for their small market capitalisations, are sometimes overlooked.
Globally, small caps represent 80% of listed companies, according to index provider MSCI, but only 14% of total market capitalisation and less than 5% of traded volumes, while large and very large caps represent 6% of listed companies and 80% of total market capitalisation.
However, small does not mean insignificant when it comes to investment "Over the long term, small caps deliver far higher returns than those of large companies on almost all equity markets worldwide," says Raphaël Moreau, Sextant PME fund manager at Amiral Gestion. "Over the last 20 years, small caps have immensely outperformed large caps."
A look at indices can confirm that. The value of Switzerland’s SMI, which includes the country’s 20 largest listed companies, increased almost seven-fold between 1996 and the end of 2021. This is a solid performance, but significantly lower than that of small and medium-sized companies. Over the same period, the SPI Extra – an index that measures the development of small and medium-sized Swiss companies not listed on the Swiss stock exchange – appreciated by a factor of 10. The same is true in the rest of Europe, where the MSCI Europe Small Cap Index has delivered net income growth of more than 500% over the last 20 years, compared with around 200% for the MSCI Europe Large Cap Index.
Why such a huge difference? "Basically, small caps are small companies. It’s easier for a company to double revenue of only a few million dollars than revenue that’s already in the billions," says Bart Geukens, portfolio manager for European small caps with asset management company DPAM. "Small caps grow at a faster rate than large caps." For example, asset manager DNCA Investments estimates that small companies in the MSCI Europe Small Cap Index grew 10% on average between 2019 and 2021, compared to a 2% decline for large and medium-sized companies in the MSCI Europe Index.