The larger they come, the harder they fall, and that seemed to be the fate of Merrill Lynch's Global Titans Fund.

Launched in 2000 at the top of the equity bull market, the fund rose 20 per cent in value and picked up £140 million (€207 million) in new business in its first six months.

Having justified its name, however, the curse of the titans befell this investor in megacap stocks and it plunged 40 per cent in value in the bear market.

Even today, although it has regained some of its former magnitude, the fund has just £90 million in assets under management, less than two-thirds of its high point six years ago.

Global Titans suffered the fate of many vehicles created in the belief that investing in the largest multinationals in the world was the best policy for savers. As is often the case, the asset managers who manufactured such funds in the late 1990s were taking their lead from the index providers. Merrill Lynch Global Titans was benchmarked against the new Dow Jones Stoxx Global Multinationals Index.

For long-term savers, the policy may yet be proved right but for those in a position to switch between large and small caps at more frequent intervals, the collapse of the megacap story in 2000 and 2001 was a signal to change size.

Over five years, from 2001 to 2005, the HSBC European Smaller Companies Index rose by more than 50 per cent compared with a fall of 8 per cent for MSCI Europe. Last year, the HSBC index rose 37.3 per cent versus 11.9 per cent for MSCI Europe.

This sort of data suggests that fixing investments in one sector of the equity market is foolish, and it may be as unwise now to back small caps as it was to buy megacaps in 2000. Analysis by Morgan Stanley confirms that the relative attractiveness of large caps to small caps seems to be cyclical, over roughly 12-year periods.

On a price-to-book measure, small caps had their greatest allure at the start of 2000, passed the average discount towards the end of 2002, and at mid-2006 reached their most expensive point, relative to large caps, for 16 years. From a nadir of almost 70 per cent price-to-book premium discount, the discount shrank to less than 10 per cent at the start of this year. Investors seemed to be ignoring the greater illiquidity of smaller enterprises that causes the discount.

Teun Draaisma, head of European equity strategy at Morgan Stanley, is clear about what action to take: "From an asset allocation viewpoint, I would definitely put money in large caps rather than small caps now," he says.

This advice might suit insurers, pension funds and the wealthy, but how do retail product providers react? Is it the year for megacap products to be relaunched? There is evidence that small-cap pooled funds are still hot: new launches across Europe rose from 17 in 2004 to 27 in 2005, according to Feri Fund Market Information.

More significantly, investors in those new funds put in three times as much last year as the year before. This may seem a worrying case of buying late, but the confidence has not been at the expense of larger caps. European investors in 2005 also doubled the amount of money they put in new all cap funds, according to Feri. But here lies the distinction: more funds are being labelled "dynamic" or "thematic" rather than large cap and sit within an all cap category, whence they can venture in any direction.

Large caps may be favoured destinations for the next six years but that will not be apparent from the label.

This saves houses having to rename funds in line with changing markets or changing fortunes. M&G's European Blue Chip Fund, for example, dropped the "blue chip" in 2004 to take advantage of star manager Giles Worthington's small and mid-cap skills. But perhaps broader, more vague product names merely reflect reality. Research from Edhec published last spring revealed that almost 70 per cent of the funds ranked as large cap in the Morningstar global equity or equity Euroland large-cap categories had more invested in small cap than large-cap stocks.

Even the man who launched Global Titans at Merrill Lynch does not expect a resurgence of megacap products over the next 18 months. "Customers like something that is easy to understand; that they can buy and not have to worry about," says Richard Royds, head of UK business at Merrill Lynch.

"Global Titans is great in that it was simple but what we have learned is that any sector product tied to cyclical performance starts to look inflexible."