During 2011, as I pointed out last week, the difference between investing in the US stock market and its counterpart in India was close to 40pc in dollar terms – the companies you picked within those markets may have been rather less important.
Sectors matter too – 2011 was a good year to be invested in businesses that are less susceptible to the ups and downs of the economy. Companies supplying goods and services that people are obliged to spend money on, like food, heating and phone bills, did better than those in more cyclical sectors.
As well as where they are and what they do, however, companies are also distinguished by how big or small they are and this too was a key factor in stock market performance last year, although one that gets less attention than the other two.
I was reminded of the size effect this week by the publication of the RBS Hoare Govett smaller companies (HGSC) index. It's the 25th edition incidentally, so happy anniversary to the London Business School's Professors Dimson and Marsh who have been gamely crunching the numbers since 1987.
After two years of out-performance, investing in smaller companies hit the buffers last year. The performance of the HGSC index (which includes the bottom tenth of the stock market by value) had a total return including dividends of -8.8pc. That compares with -3.5pc for the FTSE All Share index. By contrast, the total return of the FTSE 100 index of the biggest companies in the market was only 2.2pc down.
Not only was this a break with the performance of the previous two and a half years since the market turned up in March 2009, it was also a reversal of the long-term story. Although the index was first published in the 1980s, the data goes back to 1955 and over the full 57-year history of the series smaller companies have enjoyed a 15.1pc annualised gain, a full 3.2pc better than the All Share index.
That might not sound a great deal, but a 3.2pc difference, year-in year-out for more than half a century, represents a massive difference in total return. Over the long haul, investors have been amply rewarded for investing in riskier smaller companies.
It is never quite as straight-forward as the long-term averages might suggest, however. As the performance of smaller companies since the market low in 2009 has shown, the smaller company premium is heavily influenced by some short periods of explosive growth. At other times larger companies can be in vogue for years on end.
In this regard, the market high of 2000 was a watershed moment. In the 13 years from 1987 to 1999, larger companies did better than smaller companies (another example of a stock-market anomaly being understood and promptly disappearing!). Since the top of the dot.com bubble, however, smaller companies have come back into favour – since 2000, as the chart shows, the FTSE 100 has managed just 1.5pc a year against 5.7pc for the HGSC index and over 7pc for the FTSE250.
And there is one really striking outlier in the figures – the AIM market, which includes mainly smaller companies but which has nonetheless been a terrible performer over the past 12 years, has fallen 7.3pc a year in total return terms. In fact it's been a dog over the whole 25 year period; that may be related to the sector composition of the index or may just be a reflection of the quality of companies in the junior market. Who knows?
The key question is whether there is any practical use for investors in this data. On the face of it, the numbers seem to provide statistical support for the old adage that "elephants don't gallop". This has always been used as a justification for investing in smaller companies, the argument being that it is much harder for BP to double in size than, say, Caffe Nero. While that is true, it may also be the case that the long-term out-performance of smaller companies is simply fair recompense for the fact that they are more volatile, more exposed to the vagaries of their domestic economy and more expensive to deal in.
In the same way that spreading your investments between different countries and sectors makes sense, it is hard to argue against having a balance of big and small in your portfolio.
Tom Stevenson is an investment director at Fidelity Worldwide Investment. The views expressed are his own. He tweets at
@tomstevenson63
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