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Journal of Portfolio Management
Volume 28, Number 3
"The Small-Cap Alpha Myth." Ennis, Richard M.; Sebastian, Michael D. Spring 2002, Volume 28, Number 3, Pages 11 - 16
Investment lore has it that there is more opportunity to earn abnormal profits from small-capitalization stocks than large-capitalization stocks—that the small-cap market is less efficient. The authors find no evidence that active small-cap managers add value consistently. They demonstrate three common performance evaluation errors that contribute to what they call the small-cap myth. They also discuss securities analysts’ neglect of small stocks as well as the higher cost of researching and trading them. Whatever the differential in market inefficiency between large and small might be, the authors conclude it is not sufficient to justify the average manager’s higher cost of researching and trading smaller stocks.
If you'd like to read the entire article, go to an academic library and find the Spring 2002 Journal of Portfolio Management. (Note: This journal won't be in most public libraries.)
Different studies may come to different conclusions, but don't believe anyone who tells you that index funds are markedly inferior to an active investment strategy.