What Matters More to Investment Results, Market Cap, or Style?

Core Viewpoint - The article discusses the historical performance of large-cap versus small-cap stocks, emphasizing that while large-cap stocks, particularly the "Magnificent 7," have dominated returns in the past decade, this dominance may not be permanent and could present an opportunity for small-cap investments [1][2][12]. Historical Performance - Over the last decade, the S&P 500 gained nearly 300%, with the Magnificent 7 stocks gaining 2585%, while small-cap stocks only gained 134% [1]. - The dominance of large-cap stocks is highlighted by their contribution of about one-third of the total gains of the S&P 500 [1]. Behavioral Bias and Asset Allocation - Investors have shown a tendency towards home country bias, favoring large-cap stocks due to their media coverage and perceived glamour [3]. - Since 2015, the average allocation to small-cap stocks in mutual funds and ETFs has decreased from 12% to 8%, indicating a potential over-reliance on large-cap stocks [2]. Importance of Market Cap vs. Style - The article explores whether it is more important for investors to focus on market cap or investment style, revealing that consistently choosing the correct market cap has historically yielded better performance than style selection [12]. - A study from January 1979 to August 2025 shows that large-cap stocks gained 12.3% per year compared to 11% for small-cap stocks, with a tracking error of 10% [8]. Valuation Trends - A decade ago, small-cap stocks traded at a PE multiple of 27x earnings compared to 19x for large-cap stocks; this valuation has since flipped, with small stocks now at 19x and large stocks at 27x [14]. - Small-cap earnings have grown by 9.5% per year, while large-cap earnings have grown by 8%, suggesting that small caps may now be undervalued relative to large caps [14]. Conclusion and Recommendations - The article suggests that investors may be under-allocated to small-cap stocks and over-exposed to expensive large-cap stocks, recommending a reconsideration of asset allocation strategies before potential market shifts occur [14].