One of the biggest trends we have seen in the markets for the past 15-20 years is the spread of money in private markets.
All that money means that companies stay private for much longer than in the past.
This is a graph of Torsten That shows that IPOs are now much more mature than in the nineties:
Due to a combination of more money that flows to private markets and more heavy regulations to become public, that means fewer public companies (via Scott Galloway):
Many people assume that this is one of the big reasons why small cap stocks have performed overdue Large Cap shares for a longer period.
Maybe that’s the case.
In the past 5 and 10 years of periods, the S&P performs better than the Russell 2000 with 4.6% and 5.7% every year!
But these figures have more to do with the excellent performance of the S&P 500 than terrible performance by small CAP shares:
Small Cap shares have been returned almost 9% per year over the past decade. It has been 10% per year in the last 5 years. Those are solid returns. It’s just not as good as the S&P 500 because technical shares have been so incredible.
Many investors are afraid that small CAP shares are intended to perform behind forever, because companies stay private for longer.
However, it is important to remember that most IPOs do not provide great investments. You only hear about the good, not all failures.
Jay Ritter is a professor at the University of Florida who has studied extensively IPO performance. View the results:
IPOs have disadvantaged the stock market with a wide margin. The majority of the return comes on the first day when most investors have no chance to get shares.
You could claim that Amazon was made public in the 1990s against $ 400 million, would not happen today and that makes up for a lot of the underperformance. That could be true, but there are many loser -ipos.
Look at how many IPOs continue with a negative return:
Almost 40% of the IPOs then lose more than 50% of their value of the first final race! Almost 60% have a negative return during the average hold period of 3 years. Investors in shares with small caps do not miss IPOs.
Perhaps something has changed forever and companies with large caps are simply better run. They are more efficient, have higher margins, are not influenced by interest rates in the same way and have the ability to run monopolies effectively. Moreover, private companies are publicly at large CAP levels.
It is also possible that these things are simply cyclical.
This is a graph of Exhibition A This shows the rolling three years over- and underperformance of large caps versus small caps since 1999:
There has been a lot back and forth this century. It just happens that the stocks are large cap lately on a heating.1
These relationships are not written in stone. Sometimes it is really different this time.
But the shares of Kleine Dop have done this cycle well. It is just that stocks with large cap have been extraterrestrial.
Can that continue indefinitely?
Maybe.
However, I wouldn’t bet on it.
It is impossible to predict the timing and size of these movements, but diversification between different activa classes helps to ensure that you are not exclusively invested in the under -performing segment.
Michael and I talked about small caps, IPOs and much more about this week’s video of Animal Spirits:
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Continue reading:
What happened to the small dop value?
This is now what I have read lately:
Book:
1The annual returns this century are much closer than you would expect. Until 31-8-12 it looks like this: S&P 500 +7.9% and Russell 2000 +7.6%.
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