If history is any guide, he says, small caps stand to be top performers if the economy settles into recovery mode this year.
This advantage of small caps for post-recession returns was pointed out in a recent study by Bridgeway Capital Management in Houston. The study found that during a recession, small caps slightly underperformed large caps by a margin of 5.4% to 5.9%.
In looking at the economic recoveries, however, following ten recessions since 1948, small caps were shown to be the dominant performers.
Three months after recessions, for example, small caps had an average return of 9.8%, compared with 6.5% for large caps, according to the study. A year after a recession, the average small-cap return was 24.7% while the return was 17.2% for large caps. After three years, the average small cap was up 60.1%, while the return was 46.3% for large caps. The study also concluded that post-recession returns were even greater for micro-cap and ultra-small-cap companies.
Figures like these have some small-cap managers questioning the conventional wisdom that says small caps are a risky play. "I don't know why that mantra has gained so much credibility," Roumell says. "During any period of time that is needed to invest in the stock market, small outperforms large. On what basis is a diversified small-cap portfolio more risky than a large portfolio?"