Institutional Investment Consulting and Fiduciary Services Insights July 2024

Author: Phil Fabrizio, CFA

null

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.

Notes

1The market capitalization of a stock equals the stock's price multiplied by the number of shares outstanding. Small cap stocks are generally defined as those with market capitalizations less than $2 billion.

2A well-known 1992 research paper by Nobel laureates Eugene Fama and Ken French introduced the Fama French Three-Factor Model for pricing stocks based on research indicating that small cap stocks tend to outperform large cap stocks over time.

VIEW WHITEPAPER

Author Information

Disclaimer

This material was created to provide information on the subjects covered, but should not be regarded as a complete analysis of these subjects. The information provided cannot take into account all the various factors that may affect your particular situation. The services of an appropriate professional should be sought regarding before acting upon any information or recommendation contained herein to discuss the suitability of the information/recommendation for your specific situation.

Gallagher Fiduciary Advisors, LLC ("GFA") is an SEC Registered Investment Advisor that provides retirement, investment advisory, discretionary/named and independent fiduciary services. GFA is a limited liability company with Gallagher Benefit Services, Inc. as its single member. GFA may pay referral fees or other remuneration to employees of AJG or its affiliates or to independent contractors; such payments do not change our fee. Neither Arthur J. Gallagher & Co., GFA, their affiliates nor representatives provide accounting, legal or tax advice.

Securities offered through Osaic Wealth, Inc. member FINRA/SIPC. Osaic Wealth is separately owned and other entities and/or marketing names, products or services referenced here are independent of Osaic Wealth. Neither Osaic Wealth nor their affiliates provide accounting, legal or tax advice. Review the Osaic Form CRS.