Small could be beautiful

Small could be beautiful

At 11 years and counting, this is the longest bull market in history - driven primarily by the record-breaking performance of mega caps, led by the technology giants. But history shows that the big names that wield an outsized influence on market cap weighted indices seldom maintain their position at the top of the S&P leader board from one decade to the next. As we enter a new decade, investors may be better placed focusing on small and mid-sized companies, which are under-owned, cheaper and will benefit more quickly if the global economy picks up steam.

The rise and rise of large caps

The S&P 500’s ten largest companies’ combined market capitalisation is now more than three times that of the entire Russell 2000 index of US small cap companies. This is the highest it has been in 50 years and each peak typically happens at the end of a decade.

Within the context of S&P 500, the percentage share of the top 10 companies of the index at 22 per is approaching highs seen in the 2000s. There are a number of reasons for this extraordinary performance including monopolistic financial performance based on network effects, extremely loose monetary policy and the rise of passive funds. But that could be about to change.

History shows that the track record of mega cap companies maintaining their status at the top of the S&P leader board from one decade to another is, at best, average. The top 10 list typically changes by at least 50 per cent over the following decade as the drivers of performance alter significantly and new trends emerge.

Source: Fidelity International, January 2020

Focus on small and mid-cap

Already many investors are on the hunt for the companies that will form the next top ten in the S&P 500 in the 2020s. But we believe that a more prudent strategy would be to focus on smaller and mid-sized companies at this point in the latest “mini” cycle of this multi-year bull market, avoiding both the overvaluation and concentration risk in the larger cap area while also benefiting from the emerging long-term structural trends fuelling corporate growth lower down the scale.

The recent jump in the ISM Manufacturing Index, which is closely tied to the performance of small caps, and signs of a truce in the US-China trade war bode well for these domestically-oriented companies. Indeed, there are signs of improving risk sentiment: the Russell 2000 hit new highs in December but remains largely undervalued compared to large caps. And if the global economy picks up, these companies stand to do much better than the broader market.

While it may be difficult to envisage today how or why mega caps will underperform given their sustained rise or which of these companies will be replaced by others, continuing to invest in them as a group risks missing out on better value elsewhere, as well as evolving trends. The view that “this time is different” may not hold. After all, it is brave to bet against the crowd but braver to bet with the future.


This document is issued by FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (“Fidelity Australia”).  Fidelity Australia is a member of the FIL Limited group of companies commonly known as Fidelity International.

This document is intended for use by advisers and wholesale investors. Retail investors should not rely on any information in this document without first seeking advice from their financial adviser. This document has been prepared without taking into account your objectives, financial situation or needs. You should consider these matters before acting on the information.  You should also consider the relevant Product Disclosure Statements (“PDS”) for any Fidelity Australia product mentioned in this document before making any decision about whether to acquire the product. The PDS can be obtained by contacting Fidelity Australia on 1800 119 270 or by downloading it from our website at This document may include general commentary on market activity, sector trends or other broad-based economic or political conditions that should not be taken as investment advice. Information stated herein about specific securities is subject to change. Any reference to specific securities should not be taken as a recommendation to buy, sell or hold these securities. While the information contained in this document has been prepared with reasonable care, no responsibility or liability is accepted for any errors or omissions or misstatements however caused. This document is intended as general information only. The document may not be reproduced or transmitted without prior written permission of Fidelity Australia. The issuer of Fidelity’s managed investment schemes is FIL Responsible Entity (Australia) Limited ABN 33 148 059 009. 

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