The S&P 500 Index is near a five-year high, but has gained less than 5% per year over that period, much lower than its average 10% per year. According to Ibbotson Associates, small caps have returned 11.7% annually since 1926, vs. large caps’ 9.8%.
Hedge funds have been a big catalyst in the money shift from Blue Chips to smaller companies. They have an ability to identify profit opportunities in small companies that have little or no public exposure. Taking large positions in these Small Cap companies and using their resources and experience has created explosive returns for investors. Hedge fund traders look for trends, and the current trend is clearly Small Cap stocks. “If you were to stick a gun to my head,” says Bear Stearns’ O’Shaughnessy, “I’d say small caps will keep beating for 20 years.”
The S&P 600 (Small Cap Index) gained a remarkable 20% in 2002, 15% in 2003 and a whopping 28% in 2004 as Blue Chip profits tanked. Small Caps were once considered the most risky of stocks to invest in. With the recent corporate scandals and weaker returns for the Blue Chips, the future of the Small Cap company looks brighter and brighter.
