Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 371

Australian large caps outperform small caps over long term

An analysis of the performance of factors in the Australian share market reveals some valuable insights for equity investors. Contrary to conventional wisdom, large capitalisation stocks have consistently beaten small-cap companies.

While most investor portfolios have exposure to one or more factors, some factors tend to deliver better risk-adjusted returns than others over the longer term. Traditionally, it is believed that small caps outperform large caps because they are growing faster, a conclusion most famously promoted by academics Eugene Fama and Kenneth French. Their research found investors were rewarded for the greater risk in backing more volatile smaller companies.

A challenge to conventional wisdom

But our factor analysis reveals that over longer-term periods of 10 and 20 years, Australian large cap stocks outperformed small caps convincingly, as shown below to 30 June 2020.

Source: Foresight Analytics and Refinitiv. Returns are measured by the Foresight Large Cap universe and Foresight Small Cap universe, which are represented by the top 90% market cap of companies in the Australian share market while the small caps are the bottom 10% of market cap.

The main reason is the concentration of the ASX200, where the weight of money, active and passive, has been directed to a few large offshore earners, the big banks, miners and healthcare. Example include miners BHP Billiton, Rio Tinto and Newcrest; financials Commonwealth Bank, Westpac and ANZ; healthcare names CSL, Sonic and Ramsay; IT heavyweights Computershare, REA and Carsales. This has entrenched the gains of large caps over small caps over the longer term.

Top performing sectors within large cap world

Within the large cap world, some sectors stand out in consistently delivering high returns over the past decade, such as healthcare, industrials, technology, consumer cyclicals and financials. The laggards over the past decade include energy, utilities and telecom.

Note: Returns are as at 30 June 2020. Thomson Reuters Business Classification (TRBC) is used for industry sectors.
Data source: Foresight Analytics Global Investment Database

High-performing stocks from the mining industry have been boosted lately by gold’s stellar performance and an uptick in other commodity prices such as iron ore. Large cap consumer non-cyclical stocks are well represented by Domino’s Pizza, whose fortunes are continuing to rise with more eating at home due to COVID-19 restrictions.

Size performance over the short term

Over the shorter periods, the story is not dissimilar and large caps outperform. Money tends to flow into particular types of assets – most notably quality stocks – during a crisis, but we found that large caps consistently outperformed small caps across all major financial market crises.

This is exactly what happened in the first month of the COVID-19 crisis, though small caps rebounded strongly after the first 30 days of the crisis. The COVID-19 pandemic resulted in large cap, quality and growth factors delivering significant positive premiums. The impact of the pandemic on factor returns has been much more severe (in speed and depth) than the previous major crises, particularly during in the first 30 days. As a result, the coronavirus pandemic provided opportunities for generating alpha from managing factor exposure or pursuing factor rotation strategy.

However, unlike previous crisis, the value factor has underperformed growth while aggressive asset growth beat conservative asset growth. In addition, after a significant underperformance from small caps, we witnessed a strong recovery after the first 30 days. Momentum and quality premiums witnessed significant volatility after first 30 days of the current crisis as well, as the chart below shows.

Initial impact of COVID-19 crisis more severe than previous crises

Given the pattern of the large cap performance behaviour during the previous three crises, investors can reasonably expect the large caps to outperform during future stock market crises.

Factor investing is often captured by active fund managers investing in assets with particular attributes such as value stocks or small caps, or ‘smart beta’ ETFs that track a rules-based index. For investors, it is important to understand how factors work when evaluating your investment’s performance and making any decisions to hire or fire a manager or invest in a particular investment product. Some factors give better risk-adjusted returns than others.

Despite the rhetoric from some investors, backing smaller, riskier stocks in the Australian share market will not necessarily give better returns than backing larger, less volatile stocks. Our share market is too concentrated for that.

Additionally, investors can manage the negative drag from size factor by avoiding passive and smart beta strategies that seek to maximise exposure to the size factor without paying any regard to other fundamentals. Investors would be better served by selecting skilled small cap active managers seeking to add value by picking fundamentally strong companies.

 

Jay Kumar is Founder and Managing Director at Foresight Analytics. This article contains general information only and does not consider your personal circumstances.

 

  •   10 August 2020
  • 5
  •      
  •   

RELATED ARTICLES

Buy the dips?

The ASX is full of old, stodgy, low-growth companies

Where do sustainable returns come from?

banner

Most viewed in recent weeks

Retirement income expectations hit new highs

Younger Australians think they’ll need $100k a year in retirement - nearly double what current retirees spend. Expectations are rising fast, but are they realistic or just another case of lifestyle inflation?

Four best-ever charts for every adviser and investor

In any year since 1875, if you'd invested in the ASX, turned away and come back eight years later, your average return would be 120% with no negative periods. It's just one of the must-have stats that all investors should know.

Why super returns may be heading lower

Five mega trends point to risks of a more inflation prone and lower growth environment. This, along with rich market valuations, should constrain medium term superannuation returns to around 5% per annum.

The hidden property empire of Australia’s politicians

With rising home prices and falling affordability, political leaders preach reform. But asset disclosures show many are heavily invested in property - raising doubts about whose interests housing policy really protects.

Preparing for aged care

Whether for yourself or a family member, it’s never too early to start thinking about aged care. This looks at the best ways to plan ahead, as well as the changes coming to aged care from November 1 this year.

Our experts on Jim Chalmers' super tax backdown

Labor has caved to pressure on key parts of the Division 296 tax, though also added some important nuances. Here are six experts’ views on the changes and what they mean for you.        

Latest Updates

A speech from the Prime Minister on fixing housing

“Fellow Australians, I want to address our most pressing national issue: housing. For too long, governments have tiptoed around problems from escalating prices, but for the sake of our younger generations, that stops today.”        

Taxation

Family trusts: Are they still worth it?

Family trusts remain a core structure for wealth management, but rising ATO scrutiny and complex compliance raise questions about their ongoing value. Are the benefits still worth the administrative burden?

Exchange traded products

Multiple ways to win

Both active and passive investing can work, but active investment doesn’t in the way it is practised by many fund managers and passive investing doesn’t work in the way most end investors practise it. Here’s a better way.

Economy

The Future Fund may become a 'bad bank' for problem home loans

The Future Fund says it will not be paying defined benefit pensions until at least 2033 - raising as many questions as answers. This points to an increasingly uncertain future for Australia's sovereign wealth fund.

Investment strategies

Managed accounts and the future of portfolio construction

With $233 billion under management, managed accounts are evolving into diversified, transparent, and liquid investment frameworks. The rise of ETFs and private markets marks a shift in portfolio design and discipline. 

Property

Commercial property prospects are looking up

Commercial property is seeing the same supply issues as the residential market. Given the chronic undersupply and a recent pickup in demand, it bodes well for an upturn in commercial real estate prices.

Infrastructure

Private toll roads need a shake-up

Privatised toll roads in Australia help governments avoid upfront costs but often push financial risks onto taxpayers while creating monopolies and unfair toll burdens for commuters and businesses.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.