A Big Break For Big Caps?

Institutions find them less hassle

The companies that make up the Standard & Poor's 500-stock index have dominated the long bull run of the 1990s: The S&P 500 has risen about 247% since the start of 1990, vs. 160% for S&P's index of 600 small-cap stocks. The conventional view is that the rise of global opportunities and massive restructuring have made big companies far more attractive to investors than small ones.

Two Harvard University economists have a simpler explanation: Institutional investors increasingly dominate the market, and big institutions like big-company stocks. In a National Bureau of Economic Research paper, Andrew P. Metrick of Harvard and Paul A. Gompers of the Harvard business school point out that firms that manage $100 million or more in securities controlled 51% of the capitalization of U.S. stock markets at the end of 1996, nearly double their 27.6% share in 1980 (chart). The rise has been powered by the growing popularity of mutual funds, whose holdings tripled, from 8.2% to 25.3%; and investment advisers, including those that manage most pension funds, up from 21.2% to 37.2%.

Institutions need to move lots of money, preferably without holding more than 5% of any company's stock--the level at which a shareholder is treated as an insider. It's easier to focus on big stocks. But the researchers predict that institutions' share of the market will stop growing eventually, so small stocks could outperform large caps--as they did from 1927 to 1980.

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