This content is from: Portfolio

Move Over Value and Growth. Company Size Is Now Driving Returns.

Large companies beat small by the widest margin since 2010, according to Morningstar.

The value versus growth debate and its effect on performance has dominated headlines for years. 

But new research from Morningstar shows that company size drove stock returns in 2021. 

In fact, the largest U.S. stocks beat their small-company peers by 13 percentage points, according to the Chicago research firm. That’s the biggest gap in 11 years. The outperformance is particularly notable given that small stocks beat larger ones for the first five months of 2021. 

The takeaway for investors, however, might be to emphasize smaller companies in their portfolios, because the lead that big stocks have enjoyed is unlikely to last. 

“Small value is the least expensive segment as a group, currently trading at 91 percent of its Morningstar fair-value estimate,” wrote Lauren Solberg in a Morningstar post. “Large-growth and large-blend companies look the most overvalued as a group, trading at approximately 20 percent above their average fair values.” 

Solberg argues that small companies — which are riskier than their larger counterparts — do well when economies are recovering. At the beginning of the year, people were optimistic that businesses would reopen and flourish, given the efficacy and availability of Covid-19 vaccines. At the same time, central bank policies were accommodative, in an attempt to keep interest rates low. Morningstar’s small-cap index was up 17 percent, compared to 11 percent for the firm’s large-cap benchmark, through June 1. 

In the second half of the year, however, challenges posed by new Covid-19 variants, inflation pressures, supply-chain glitches, and forecasts about interest-rate increases outweighed the good news in early 2021. Since June 1, Morningstar’s small-cap index has lost 3.9 percent, while large cap stocks gained 12.4 percent. This suggests that investors are gravitating to larger, less volatile stocks such as Apple and Microsoft. 

Looking at the year, the Morningstar U.S. large-cap index was up more than 25 percent as of December 17. Many of these stocks benefited from megatrends such as remote work and the surge in online shopping. The U.S. small-cap index, meanwhile, was up 11.29 percent as of the end of last month. 

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