Do small caps still have a place in your portfolio?

LAST year was a good year for stocks. The S&P 500 returned 21.8 per cent. But you would have done way better if you had just bought the five biggest companies in the US as at end 2016. The average return of the five stocks - Apple, Google, Microsoft, Exxon Mobil and Amazon - was 35 per cent. With the exception of Exxon Mobil, the returns for the four stocks ranged from 33 to 56 per cent.

In Singapore, whether it's because of the effect of exchange traded funds or some other reasons, the divide between the big and small companies has gotten bigger, particularly since the global financial crisis.

The top chart shows the total return index of Straits Times Index (STI) and the FTSE Small Cap Index. With dividends reinvested, the STI has grown from 100 to 218 in just over 17 years. As for the Small Cap Index, not only has it not grown, it has declined by close to 30 per cent in the same period.