Data stretching back to the 1950s reveals a “smaller-companies effect”: small stocks outperform larger ones around the world. They are less liquid, riskier and less well known than their bigger counterparts; outperformance compensates for these shortcomings.
In recent years, though, smaller companies have been left behind. In the UK, for example, the Numis index, comprising the bottom 10% of the market, has returned 11% over the last three years and 5% over five. The All-Share index has returned a respective 34% and 23%. The MSCI World Small Companies index has returned 15% in sterling over three years and 28% over five; the All Countries World index has returned 24% and 52%.
This trend of underperformance discourages people from investing in smaller companies, creating a vicious circle. At some point, this cycle will reverse suddenly and dramatically, but the timing is impossible to predict.
If times are bad for smaller
