If enough investors and fund managers keep saying that the Small Cap run is over and that NOW is the time for Large Caps to outperform, it just might come true. But let’s keep it in perspective and talk about hard dollars rather than percentage gains. It’s rare for me to say that, but at times, it is appropriate to change your view and see if the picture still looks the same. Reiterating my recent summary of the topic, I am not convinced that the Large Cap dominance has returned but that is not the focus of this post. Here I just want to talk about the difference between going from $1.00 to $1.65 or going from $10 to $10.70. Which would you rather have?

Since the beginning of 2001, the Russell 2000 is up about 65% compared to the Large Cap dominated S&P which is up about 7%. No matter the index, Small Caps have had higher percentage returns but let’s get real. The HEDGEfolios universe has about 400 Large Cap (over $11.1 billion) stocks with a total market capitalization of $17.5 trillion. On the other hand, I cover about 1800 Small Cap (under $1.95 billion) stocks with a combined market cap of $1.35 trillion. In fact, you can take the market caps of the 5 largest companies (XOM, GE, MSFT, C, BAC) and they eclipse all the value in the HEDGEfolios Small Cap segment. My point is that investors have made more money in Large Caps than they did in Small Caps during the past 6 years even with the differential in percentage gains.

I love Small Caps but they are what they are - small. They are also more volatile, have higher valuations and fewer of them pay dividends. Obsessing about the market’s performance on one size category vs. the other will not make me more money and therefore, it is not something I spend a lot of time on. And clearly, I am not the only one. According to Merrill Lynch, over 90% of foreign investors are biased towards Large Caps. Additionally, most stock brokers have a bias towards Large Caps, there are twice as many Large Cap mutual funds as compared to Small Cap mutual funds, and there is much more analyst coverage over Large Caps. I am not trying to make excuses for their percentage performance but at the end of the day, it’s $$$$ that matters, not %%%%. The vast majority of investors place their money in Large Caps despite the difference in percentage gains and that competition makes performance more difficult.

I believe that much of the gain in Small Caps comes from the shifts in Value and Growth investing. As the Large Cap growth bubble popped in 2000, investors were not willing to make large bets in growth stocks. However, it was possible to keep in the game on a different scale by putting money into Small Caps which gave the taste of growth investing without having to bet a big stake. Even a small percentage reallocation of money from Large Caps into Small Caps is a huge increase in demand and I believe that capital infusion is responsible for some of the gains. Meanwhile, the vast majority of Large Cap performance since 2001 has been focused on Value stocks and trying to make outsized gains is that category is tough for any long term investor. I am not saying it’s easy to make money on Small Caps but when you consider the scale, I think it’s easier than trying to do it with Large Caps.