Against a backdrop of macroeconomic uncertainty, European fund buyers have adopted an increasing bias towards large cap stocks. The tendency is strongest for European equities. The share of fund selectors preferring large caps has grown in almost every country.
EIE data gathered since autumn 2013 show that there was a preference for European small cap equities in all countries except for Spain. A year on, fund selectors prefer European large caps over smaller companies in all countries, except for Denmark, Norway, Luxembourg and the Netherlands (see chart below).
Denmark is the odd one out, as it is the only country where small caps are more popular now than in the beginning of the year. In general, there is general preference for small cap stocks in the Nordic country anyway, more so than in most other countries. “We are a nation dominated by smaller-sized companies, so that could explain this preference,” says Allan Møller, head of fund selection for Danske Capital. “But personally I do not have a preference for small or large. When coming out of a crisis, I would normally prefer large caps and then switch to small caps later in the cycle, but right now it is all about selecting the right securities.”
Small cap underperformance
The sentiment change, which has been most radical in Germany, Norway and Belgium, comes as small caps underperformed large caps in the second half of this year. Since the turn of the century, this only happened in 2006-2008 and in 2011.
For US equities, sentiment is also in favour of large caps, but the change is less significant as fund selectors already slightly preferred US large caps over small caps in the beginning of the year. US small caps also performed much better than their European equivalents this year (see chart below). Only in Germany and Finland, there has been a clear shift from small caps to large caps.
As far as EM equities are concerned, there is a traditional preference for large caps. This hasn’t changed over the course of the year, with the notable exception of Norway. The majority of Norwegian fund selectors prefer EM small caps over large caps, compared to less than a quarter a year ago.