By Thomas O. Herrick
Chief Investment Officer, Managing Director
Within the context of a diversified equity portfolio, we recommend long-term exposure to small capitalization companies. Comparing the Russell 2000 (small cap) and Russell 1000 (large cap) indexes we note the following data regarding a massive dispersion between small caps and larger companies. Current earnings multiples in small caps suggest 11% annualized returns over the next 10 years vs 5% annualized returns for large caps. That conclusion is based on historical regression of price to earnings multiples versus subsequent returns. The relative forward price/earnings (P/E) multiple of the Russell 2000 vs Russell 1000 also suggests that small caps could outperform large caps over the next ten years.
Source: BofA US Equity & Quant Strategy, FactSet
Source: BofA US Equity & Quant Strategy, FactSet
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