Biggest get bigger…is this true?

Diversification is an important factor to consider for money management and it is mentioned in every investment text book we look at.

For those who do not have the time or knowledge to actively look into the market, it is good to notice the difference in performance between larger companies and the smaller ones.

A recent study by Morningstar showed that larger cap companies do outperform the smaller ones. The analysts in the study selected the top 1% of the US stock market and since August 2013 these stocks (which account to 67) would have generated an annualised gain of 13% over a 5-year period. In contrast, the study showed that the same tactic employed for the remaining 99% would generate almost no return.

The study also showed that since 1926, half of all US listed stocks have posted negative returns! It is impressive to find out that the largest companies fared very well and amongst the 67, only 4 lost money for the half decade.

One of the arguments in favour for the good performance of larger cap stocks is investor demand. This is more highlighted in particular for tech stocks like Apple, Amazon, Facebook and others whereby a huge demand has helped the stock prices to rise higher and higher.

Large Cap companies also benefit from the fact that they will attract index funds (trackers or ETFs) and hence will augment more the demand for that particular stock.

Having said that however, for companies to grow larger and attract attention they need to first generate good economic numbers. It is therefore at this point whereby the company make most gains and will, by time, develop and attract even more interest consequently becoming larger and larger.

All of this shows us the very importance of having professional managers that have the pulse on the market and are actively seeking the best companies to invest in during different time periods.

0 - Comments