The advantages of small caps

HISTORICALLY since 1975, small-cap equities have outperformed large-cap equities by an average of 4 per cent in years of GDP expansion, according to MSCI data. In line with our expectation that the global economy will accelerate in 2014, we are convinced that smaller companies will be the beneficiaries of the current expansionary phase of the global economy, reinforcing our conviction that investors should give small cap equities real consideration in their portfolios.

Despite this phenomenon, small caps have been consistently overlooked by investors for years. Smaller companies represent an under-owned asset class, though this is not a wholly intentional decision by investors. Institutional investors, in particular, have "unconsciously" adopted an underweight position in smaller companies. The reasons are manifold.

Moves away from equities and into bonds, and away from regional and into global portfolios, have clearly contributed. Academic work also highlights a general preference on the part of institutional investors for large and liquid equity holdings.