According to research firm Birinyi Associates, large-cap stocks have significantly outperformed small caps since the end of August. Their study showed that the largest 10% of stocks in the Russell 3000 (a broad market index) gained an average of 7.48% through 11/10/09, versus a loss of 1.50% for the smallest 10% of stocks.
I do not believe that this trend is indicative of a change in investor risk appetite, but can be explained by three themes that are a byproduct of the market environment.
First off, small stocks have had a much stronger rally since the market bounce in March, outgunning their larger rivals by a significant margin. In the last two months, investors wary of the rise in the market but unwilling to miss the updraft have concentrated more on valuation—and since larger company issues are still reasonably priced, those are starting to receive more inflows.
The weaker dollar is another theme that investors are eager to play. Large companies are typically geographically diverse, and benefit from increased growth in emerging economies and stronger currencies. As a result, investing in large cap growth and value stocks can increase foreign exposure without having to buy non-dollar denominated assets.
The need for current income is also a factor in explaining the sudden popularity of large-company stocks. Dividends are an important component to overall return. Currently the Russell 1000 value ETF (IWD) boasts a dividend of 2.63%, 50 basis points larger than the small-cap Russell 2000 value offering (IWN). There are a number of large cap names that have dividends over 3%. This is much higher than can be earned at banks, and considering the Fed’s stance on keeping rates low for the foreseeable future, this isn’t likely to change.
Ben Warwick (ben@qesinvest.com) is chief investment officer of Quantitative Equity Strategies LLC in Denver, and Memphis-based Sovereign Wealth Management, Inc.
See More of Ben Warwick’s Portfolio Gourmet Blog Post
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