Small Cap Stocks and Index Funds

It is often argued that mutual fund managers who invest in smaller companies can do better than index funds which specialize in the smaller cap stocks. At times they have not done as badly as their colleagues, when trying to outperform the indexes of larger companies.

But there is a fallacy here. Few managers can truly evaluate smaller companies, just as they cannot evaluate larger companies. Smaller companies are more erratic than those larger, and their corporate fortunes more difficult to anticipate.

Smaller public companies may do better than larger companies for shorter periods but are more susceptible to business hazards and cycles.