Economics and markets
March 29, 2022
In this video interview, Vanguard Global Chief Economist Joe Davis says there are times when small-cap equities outperform large-caps and vice versa, but not in any meaningful way over the long term.
Mike Collins: We do have a lot of people that are interested in hearing our outlook on small-cap versus large-cap, and you did touch on that briefly in the beginning. I just would like to circle back and just see if we could get some more full comments around that.
Joe Davis: Yes. At least at this stage of the cycle, we're not projecting material–I would call them economically meaningful—differences between the large and small space. That may sound as a surprise given my other comments, Mike, but that's really around the technology in the growth side rather than a size perspective. And generally strategically, you know, from a long-term strategic portfolio, we do not expect, and I think academic research would confirm at least our view and our analysis, which is we do not generally expect a risk premium of size in the market.
It's a risk factor. I mean there's times when small-cap companies outperform large and vice versa, just like there's sector effects, but we would not expect on a strategic basis smaller-cap companies to outperform large-cap companies in any meaningful way. If it does, it's more from just noise or because of another factor that may be contributing to it, but it's not a premium that we think in steady state small outperforms large. The general academic literature would be consistent with our interpretation and that would be different from say value over growth that, at the margin over very long periods of time, value-based companies modestly outperform growth-based companies. And that's been an argument that's been coming under scrutiny over the past decade given technology's rise and significant outperformance. So we don't anticipate a meaningful outperformance over the next five or ten years.
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