Inquiry minds may notice that in the last few months the small cap fund ($Rut) outperforms the middle cap (Nasdaq) that in turn outperforms the large cap (S&P500) that outperforms the Dow 30. Why is there such a clear relationship between the fund performance and the company size. My answer to this is that the smaller business tends to grow faster than the larger one during the inventory accumulation phase in which 1% sale expansion will transfer to its next production chain about 2% sale growth which subsequently transfer 4% sale growth to its immediately next chain. Down the production chain are typically the smaller businesses providing supports and parts to their upper production chains. Therefore, the lower of the production chain, the smaller the business. As the companies down the production chain grow a lot faster than the business in the upper chain, it is not hard to understand that the small caps in general outperform the large caps.
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