Dear Financial Voice Reader: Where can you get better returns for your SIPP/ISA – large companies or smaller ones?

Wednesday 29th September 2021 02:04 EDT

Where can you get better returns for your SIPP/ISA – large companies or smaller ones? Many Asian Voice readers have asked me exactly this question.


A year on from the US lockdown, the economic recovery is well on its way. Vaccine rollout has been a success, and government stimulus packages have held up the economy. For a long time, this recovery was slightly uneven and favoured large-cap stocks. However, this has begun to change.


Let's look at how small-cap and large-cap stocks are performing and figure out which size company offers the best value for the future.


Small-Cap Optimism

Thanks to a return to more typical economic conditions, there is a lot of optimism in the air among investors and business owners. Small-cap firms, in particular, will welcome the recovery. Typically, they are more sensitive to economic conditions.


Small-cap growth stocks shot up 16.5% during the first half of 2021. Additionally, small-cap value stocks have risen 30.6% in the same period. On top of this, the S&P SmallCap 600 index has grown by 23.6%. These returns have outpaced the mid-and large-cap indices — S&P MidCap 400 (17.6%), and S&P 500 (15.3%)


These represent fantastic performance for the type of investor who has the grit (and the patience) to endure the short-term volatility and risk inherent in small-cap stocks. Indeed, for those who can wait, there is considerable potential for solid long-term gains.


Will Market Leadership Shift?

Over the last three or so months, the ongoing narrative has favoured large-caps stocks. Indeed, the current risk-adjusted rankings for US-style indexes (based on Canterbury's Volatility-Weighted-Relative-Strength) has supported large-cap firms. The performance hierarchy has been: Large-cap, mid-cap, small-cap.


This pattern has repeated itself across the S&P 500, with the biggest securities outperforming the overall market. For example, the S&P 500 is up 8% overall. However, in the same period, the Tech sector has grown 16.5%, while Communications, Discretionary, and Healthcare are around 10%. These sectors are responsible for roughly two-thirds of market growth.


Aside from Real Estate, none of the other seven sectors has grown more than 5% over the last three months. It's clear that smaller sectors are beating the market.


But in recent weeks, a different picture is emerging. Utilities, Financials, and Consumer staples have started to outperform, suggesting that there could be some shift in market leadership.


As August began, Utilities and Consumer staples were the 10th and 6th best-performing sectors. However, Utilities have shot up to #4, while Consumer stapes are at #3. Could this herald greater participation of different types of securities in the market as the economy bounces back?


What Small-Cap Stocks Looking Strong?

If small-cap stocks are on the rise, which represents the best options?


According to their relative number of hedge fund owners, three stocks are looking promising:

  • Hostess Brands, Inc, a leading American packaged food company,

  • Turning Point Brands, Inc. an American tobacco manufacture

  • Bloomin’ Brands, Inc. American restaurant holding company


Another area full of potential is to be found in the Alternative Investment Markets (AIM). Investors Chronicle recently published its recommendations and found 30 AIM stocks that passed its screening methods. They've highlighted Boohoo and Asos as two fashion stocks that performed well on their rating.


How Will Large-Cap Stocks Perform?

Large-cap stocks S&P 500 performance has been primarily driven by tech stocks. Overall, large-caps have outperformed other stocks, but if the FAANGs slow down, what would the picture look like? 


If you take out Facebook, Apple, Amazon, Netflix, Google, and also Microsoft, the S&P 500 looks a little less rosy. In fact, the equal-weight S&P 500 has been drifting sideways for the last few months. A distinct picture is emerging: Cap-weighted S&P 500 is being driven by tech stocks, with Healthcare and Real Estate also performing well.


What Mutual Funds are Worth Looking At?

Of course, despite the optimism around small caps, large caps still have a place in any investor's portfolio. There are some exciting options to consider for anyone looking to enter the market via mutual funds focused on mid or large-cap firms.


Large-cap mutual fund Canara Robeco Bluechip Equity Fund has posted 5-year returns of 17.98%. The Axis Bluechip Fund (18.27%) and the Mirae Asset Large Cap Fund (16.92%) are other strong performers.


Mid-cap mutuals could be an option for investors looking for slightly higher returns (with slightly higher risk). PGIM India Midcap Opportunities Fund has returned 22% over five years, while Axis Midcap Fund (21%) and Quant Mid Cap Fund (20.96%) aren't far behind.


Personally, in this market which is a bit expensive I want the safety of large cap, high cash flow generating profitable companies – that means tech stocks I’m afraid.


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