Bigger is better: Risky small stocks not worth the reward

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Morningstar research finds large Australian-listed companies have mainly outperformed market minnows during the past 23 years.

Big, blue-chip Australian-listed companies outperform smaller ones, research has found, despite a long-held expectation that investors will be rewarded over the long term for the extra risk they take by investing in small companies.

If the $10,000 had been put into the large cap index it would have grown to about $60,000, or to twice as much, over the period. The returns are “total” returns, where the dividends of the investments are re-invested. Index-tracking investing is known as passive investing and is distinct from active investing, where the fund manager buys and sells shares in companies with the promise that they can beat the market returns after fees.“In Australia, passive investing in small caps is unlikely to constantly deliver the return premium that investors were perhaps expecting,” Maclennan says.

However, the dispersion of the returns of active small-cap managers is large. One active manager beat the return of the S&P/ASX200 by almost 10 percentage points over the past 10 years. There is a question over the quality of the Australian small-cap index itself, which has a large weighting to companies in the mining sector. Some of these are highly speculative and in the exploration stage.

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