Large capitalization stocks are likely to outperform small cap stocks over the next decade, according to BNY Mellon Beta Management.
On Tuesday BNY Mellon Beta Management, a BNY Mellon Asset Management business that facilitates rebalancing programs and synthetic asset class exposure through the use of futures, swaps, index funds, and exchange-traded funds (ETFs), announced that it expects better returns and lower transaction costs for large caps over the medium to long term.
“Looking at the differential between the expected returns of large cap and small cap stocks, it appears that large caps have a good chance of outperforming small stocks over the next decade," said Mark A. Keleher, chief executive officer of BNY Mellon Beta Management, in a statement. “Once you figure in the higher transaction costs for small caps, large caps appear even more attractive.”
Transaction costs are estimated to be approximately 14 basis points higher for U.S. small caps compared with U.S. large caps and even higher in other global developed markets. Turnover also tends to be higher in small cap indexes and small cap active portfolios than their counterparts at large cap indexes and large cap active portfolios, which will increase the odds of large cap outperformance, according to BNY Mellon Beta Management, a division of The Bank of New York Mellon.
BNY Mellon Beta Management studied the expected returns of small caps versus large caps in June 2010 using The Standard & Poor's 500 Index and the Russell 2000 Index as proxies for large caps and small caps. The firm updated its calculations in January 2011 and found large caps significantly undervalued compared with small caps. The study looked at small and large cap stocks in the United States and other developed markets by examining the current price of individual securities, consensus earnings expectations over the next few years, and the long-term growth rate for the gross domestic product for the countries in which each company is based.
“The last time the valuations metrics sent such a strong signal was in June 1983, and over the following decade the Standard & Poor's 500 on average returned 10.4 percent annually, easily outperforming the Russell 2000, which returned an average of 6.5 percent annually over the same period,” Keleher said. “The relative attractiveness between large cap and small cap stocks varies over time, and small caps had a great run for the last few years. However, the tide appears to have turned in favor of large caps."