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.

 

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

Raising the GST to 15%

Treasurer Jim Chalmers aims to tackle tax reform but faces challenges. Previous reviews struggled due to political sensitivities, highlighting the need for comprehensive and politically feasible change.

7 examples of how the new super tax will be calculated

You've no doubt heard about Division 296. These case studies show what people at various levels above the $3 million threshold might need to pay the ATO, with examples ranging from under $500 to more than $35,000.

The revolt against Baby Boomer wealth

The $3m super tax could be put down to the Government needing money and the wealthy being easy targets. It’s deeper than that though and this looks at the factors behind the policy and why more taxes on the wealthy are coming.

Are franking credits hurting Australia’s economy?

Business investment and per capita GDP have languished over the past decade and the Labor Government is conducting inquiries to find out why. Franking credits should be part of the debate about our stalling economy.

Here's what should replace the $3 million super tax

With Div. 296 looming, is there a smarter way to tax superannuation? This proposes a fairer, income-linked alternative that respects compounding, ensures predictability, and avoids taxing unrealised capital gains. 

The rubbery numbers behind super tax concessions

In selling the super tax, Labor has repeated Treasury claims of there being $50 billion in super tax concessions annually, mostly flowing to high-income earners. This figure is vastly overstated.

Latest Updates

Investment strategies

Trump's US dollar assault is fuelling CBA's rise

Australian-based investors have been perplexed by the steep rise in CBA's share price But it's becoming clear that US funds are buying into our largest bank as a hedge against potential QE and further falls in the US dollar.

Investment strategies

With markets near record highs, here's what you should do with your portfolio

Markets have weathered geopolitical turmoil, hitting near record highs. Investors face tough decisions on valuations, asset concentration, and strategic portfolio rebalancing for risk control and future returns.

Property

Soaring house prices may be locking people into marriages

Soaring house prices are deepening Australia's cost of living crisis - and possibly distorting marriage decisions. New research links unexpected price changes to whether couples separate or silently struggle together.

Investment strategies

Google is facing 'the innovator's dilemma'

Artificial intelligence is forcing Google to rethink search - and its future. As usage shifts and rivals close in, will it adapt in time, or become a cautionary tale of disrupted disruptors?

Investment strategies

Study supports what many suspected about passive investing

The surge in passive investing doesn’t just mirror the market—it shapes it, often amplifying the rise of the largest firms and creating new risks and opportunities. For investors, understanding these effects is essential.

Property

Should we dump stamp duties for land taxes?

Economists have long flagged the idea of swapping property taxes for land taxes for fairness and equity reasons. This looks at why what seems fairer may not deliver the outcomes that we expect.

Investing

Being human means being a bad investor

Many of the behaviours that have made humans such a successful species also make it difficult for us to be good, long-term investors. The key to better decision making is to understand what makes us human and adapt.

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.