January 25, 2011

Large Cap Stocks Poised to Outperform Small Caps, According to Study by BNY Mellon Beta Management

BNY Mellon Asset Management Unit Sees Better Returns, Lower Transaction Costs for Large Caps

SAN FRANCISCO, January 25, 2011 — Large capitalization stocks are poised to outperform small capitalization stocks over the medium to long term, according to a recent analysis by BNY Mellon Beta Management, a BNY Mellon Asset Management business that facilitates rebalancing programs and synthetic asset class exposure through the use of futures, swaps, index funds, and exchange-traded funds (ETFs).

The Standard & Poor's 500 Index and the Russell 2000 Index served as proxies for large caps and small caps, respectively, in the study.

"Looking at the differential between the expected returns of large cap and small cap stocks, it appears that large caps have a good chance of outperforming small stocks over the next decade," said Mark A. Keleher, chief executive officer of BNY Mellon Beta Management.  "Once you figure in the higher transaction costs for small caps, large caps appear even more attractive."

BNY Mellon Beta Management, a division of The Bank of New York Mellon, studied the expected returns of small caps versus large caps in June 2010 and updated its calculations in January 2011.  The June 2010 study concluded that large caps are undervalued compared with small caps.

"When we updated our calculations in January, once again large caps appear to be significantly undervalued compared with small caps," Keleher said.  "The last time the valuations metrics sent such a strong signal was in June 1983, and over the following decade the Standard & Poor's 500 on average returned 10.4 percent annually, easily outperforming the Russell 2000, which returned an average of 6.5 percent annually over the same period."

The study in June 2010 and the updated review in January 2011 calculated expected returns for small cap and large cap stocks in the United States and other developed global markets by examining the current price of individual securities, consensus earnings expectations over the next few years, and the long-term growth rate for the gross domestic product for the countries in which each company is based.

Transaction costs are estimated to be approximately 14 basis points higher for U.S. small caps compared with U.S. large caps and even higher in other global developed markets.  Turnover also tends to be higher in small cap indexes and small cap active portfolios than their counterparts at large cap indexes and large cap active portfolios, which will increase the odds of large cap outperformance, according to BNY Mellon Beta Management.  

"The relative attractiveness between large cap and small cap stocks varies over time, and small caps had a great run for the last few years," Keleher said.  "However, the tide appears to have turned in favor of large caps."

BNY Mellon Asset Management is the umbrella organization for BNY Mellon's affiliated investment management firms and global distribution companies.

BNY Mellon is a global financial services company focused on helping clients manage and service their financial assets, operating in 36 countries and serving more than 100 markets. BNY Mellon is a leading provider of financial services for institutions, corporations and high-net-worth individuals, providing superior asset management and wealth management, asset servicing, issuer services, clearing services and treasury services through a worldwide client-focused team. It has $25.0 trillion in assets under custody and administration and $1.17 trillion in assets under management, services $12.0 trillion in outstanding debt and processes global payments averaging $1.6 trillion per day. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation (NYSE: BK). Additional information is available at www.bnymellon.com.

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