Small Cap Stocks May Prove Challenging, According to Study by BNY Mellon Beta Management

BNY Mellon Asset Management Unit Sees High Transaction Costs, Unexceptional Returns

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Jul 28, 2010, 08:24 ET

SAN FRANCISCO, July 28 /PRNewswire-FirstCall/ -- The relatively high transaction costs associated with small cap stocks combined with forecasted returns that are not expected to exceed those of large cap stocks make the asset class relatively unattractive at this time, according to a recent study 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 study 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.

"In the U.S., we believe the expected returns premium for small caps is zero when compared with large cap stocks," said Mark Keleher, chief executive officer of BNY Mellon Beta Management. "This means that an investor would not receive excess compensation for investing in a less liquid market." The last time this occurred was in March 1983. The large-cap Russell 1000 outperformed the small-cap Russell 2000 in terms of price appreciation by an average of 48 basis points annually over the subsequent 27 years according to the study.

However, there have been several periods of small caps outperforming large caps in that time frame, the BNY Mellon Beta Management white paper notes.

In assessing global small cap stocks, the report concluded that expectations are lower than they are for global large caps.

The white paper reports that 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 as turnover 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.

"We're not saying that small caps are always a bad investment," said Keleher. "There tend to be periods where small caps outperform, but this does not appear to be one of them. Small caps in developed global markets did particularly well in the 12 months ended May 31, 2010, when they out-performed global large caps by over 15 percent. However, our study indicates the optimum time to invest in small caps may have passed."

Notes to Editors:

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 $21.8 trillion in assets under custody and administration and $1.0 trillion in assets under management, services $11.6 trillion in outstanding debt and processes global payments averaging $1.5 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.

All information source BNY Mellon Asset Management at June 30, 2010. This press release is qualified for issuance in the UK and US and is for information purposes only. It does not constitute an offer or solicitation of securities or investment services or an endorsement thereof in any jurisdiction or in any circumstance in which such offer or solicitation is unlawful or not authorised. This press release is issued by BNY Mellon Asset Management (US) and BNY Mellon Asset Management International Limited (ex-US) to members of the financial press and media and the information contained herein should not be construed as investment advice. Past performance is not a guide to future performance. Registered office of BNY Mellon Asset Management International: The Bank of New York Mellon Centre, 160 Queen Victoria Street, London, EC4V 4LA. Registered in England no. 1118580. Authorised and regulated by the Financial Services Authority

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