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Size matters - as does timing

Bron: Article Melissa Lin, Data Scientist NNIP - 25 februari 2019

Size premium persists over the long term
The cumulative returns of small-cap stocks have significantly exceeded those of large caps over the past 100 years. Investors have dubbed this relative outperformance the “size premium”. One explanation for this premium is that it arises for rational economic reasons, as a reward for investors who invest in small-cap stocks. Small caps are less liquid; receive less analyst coverage, which may increase the risk of mispricing; and are less likely to be included in indices, leading to stocks being overlooked by passive investors. Behavioural finance also provides us with an explanation for the anomaly: investors prefer positively skewed assets (i.e., investments that provide a small chance of a large payoff), such as small caps.

While we cannot predict future returns, we can look at historical stock returns for evidence of a size premium. Professors Eugene Fama and Kenneth French conducted a study measuring the performance of US small-cap stocks relative to US large-cap stocks. The results showed that over an 87-year period, between 1926 and 2013, small caps outperformed large caps by over 2% per year(1).

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