Economic Views

The case for small caps in a world of deflation and disruption

The recent under performance of a number of small cap markets has prompted suggestions that the traditional arguments in their favor no longer hold. We disagree. As we enter a period of unprecedented disruption and deflationary growth, we argue that small caps can bring a number of unique characteristics to a wider portfolio.


Over the last 30 years, the case for investing in small caps has been debated extensively. The long-term statistics certainly suggest that smaller companies do indeed outperform larger ones. There is less agreement on the reasons. The explanations range from the contention that small caps offer a risk premium in return for lower liquidity, that limited research means any new information has a bigger impact on the shares, and/or that small companies in aggregate tend to grow faster than larger ones. Whatever the case, even though US small caps have underperformed large by over 10% in the last two years, their outperformance over a longer period is dramatic. So what of the future?

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