Over the long term small caps stocks have outperformed large caps stocks[sup]i[/sup] . However many investors believe small caps are more risky and therefore allocate a smaller percentage of small caps than large caps to their portfolios. Their concerns with small caps may be dependent on their definition of risk as well as the time period which the investors are considering. An investment’s risk can be defined in a number of ways, such as range of returns, standard deviation, or simply the likelihood of losing the original investment. Comparing the standard deviation of small cap stocks to large cap stocks, one may conclude that small caps, with higher standard deviation, are more volatile than large caps.[sup]ii[/sup] However when viewing risk in terms of the probability of losing some or all of an original investment, a Deutsche Asset & Wealth Management study found small cap stocks appear to perform similarly to large cap stocks over the long term.[sup]iii[/sup] Deutsche Asset & Wealth Management analyzed rolling[sup]iv[/sup] returns from June 1930 to 2013 and observed small caps delivered no periods of negative returns across rolling 10 year periods, and by three years the percentage of periods with negative returns was nearly the same as those for large caps.[sup]iii[/sup] Their analysis suggests that though yearly returns may vary significantly, holding small caps stocks for longer periods reduces volatility and may preserve capital as well as large cap stocks.
An examination of small cap returns (IA SBBI U.S. Small Cap Stock Index)i and large cap returns (IA SBBI S&P 500 Index)i from 1926 to 2013 shows that small caps outperformed large caps by 2.4% annually.[sup]iii[/sup] As holding period increases, small caps may not only protect capital in the same way as large caps but also provide solid returns. The below chart compares the range of monthly rolling returns for various holding periods from 1950 to June 2015 for small cap stocks and for the S&P 500. As indicated in the chart, volatility is reduced as holding period increases. Small caps exhibit zero periods of negative returns once a rolling period reaches 10 years (which cannot be said for large caps). Additionally the small cap median return among the rolling 10 year periods is 11.9% compared to 10.6% for large caps.
|
Small Capitalization Stocks |
Standard & Poor’s 500 |
||||||||||||||
|
1 Year |
3 Year |
5 Year |
7 Year |
10 Year |
15 Year |
20 Year |
1 Year |
3 Year |
5 Year |
7 Year |
10 Year |
15 Year |
20 Year |
||
|
Max Value |
97.5% |
44.5% |
39.7% |
33.4% |
27.4% |
22.6% |
19.2% |
61.2% |
33.3% |
29.6% |
23.0% |
19.5% |
19.7% |
18.3% |
|
|
Median |
15% |
13.3% |
12.9% |
11.9% |
11.9% |
12.7% |
12.9% |
13.6% |
11.8% |
11.3% |
10.5% |
10.6% |
10.7% |
10.8% |
|
|
Min Value |
(45.9%) |
(17.9%) |
(12.3%) |
(7.8%) |
1.2% |
4.0% |
6.3% |
(43.3%) |
(16.1%) |
(6.6%) |
(3.8%) |
(3.4%) |
4.1% |
||
[sup]v[/sup]Compound Annual Returns 1950 – June 2015; Rolling Periods Using Monthly Observations; Small caps are the Russell 2000 Index[sup]vi[/sup]
Similarly the Anchor Capital Small Cap Value portfolio’s long term performance compares favorably to large cap stocks, as well as to its Russell 2000 Value benchmark. Our investment philosophy supports a long term holding approach as one means of preserving capital. Our long term view allows us to target small, undervalued companies that are undergoing positive internal and/or external change. Our stock selection is based on a long term investment horizon which coincides with the time we expect the positive change to be revealed. As a result our holding period is generally three to five years, though our turnover has trended less than 20% for the past five years. We believe our process offers a high probability of risk‐adjusted outperformance and has historically resulted in lower standard deviation relative to the Russell 2000 Value Index. The below chart compares the percentage of periods, across multiple time horizons, in which rolling returns are negative for the Anchor Capital Small Cap Value, the Russell 2000 Value, and the S&P 500. As depicted, our results since inception highlight the advantages of taking a long term investment approach to protecting capital.
Despite the greater volatility of small cap stocks, holding them over long periods can result in equal capital preservation to holding large caps. By focusing on the long term, Anchor Capital’s Small Cap Value philosophy seeks to outperform and protect principal over multiple market cycles. Investors with long investment horizons should consider the benefits of adding small cap stocks to their portfolios.
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