Big cap funds may be overdue


Investors used to love to brag about the big-time stock names they held in their portfolios.

Over the past five years, however, they've increasingly turned introspective. That's because performance of well-known large-capitalization stocks has lagged well behind small- and mid-cap stocks.

Name recognition and glittery histories couldn't guarantee stock performance.

Though periodically showing renewed vigor this year, the larger-company stocks of the Standard & Poor's 500 are up just 1 percent compared with the smaller-firm Russell 2000's gain of nearly 7 percent. Mutual funds mirror those results, and foreign funds continue to attract the most assets from investors.

More than a few strategists consider all of this ridiculous because large caps are exactly the sort of investments they say you should want to hold for a long time.

To their way of thinking, large caps are overdue. Their businesses have staying power and their stocks are less likely than foreign or smaller-cap stocks to capsize in difficult economies. They're also more likely to offer dividends to keep you interested even if stock performance disappoints.

Best of all, big-cap stocks appear to be cheap.

"I feel like a kid in a candy store because some of the most attractive stocks in the market from a valuation standpoint are also some of the best companies," said Richard Cervone, managing director and a portfolio manager of the $4 billion Putnam Investors Fund. "Just because a stock is down a lot doesn't necessarily mean it's undervalued, but we do see a lot of value."

Putnam Investors Fund's 12 percent one-year return and 15 percent three-year annualized return rank in the top one-fourth of large-cap growth and value funds. Its management team takes into account both analyst recommendations and quantitative analysis.

Forget all the excitement of the latest hot investments, urge the large-cap proponents.

"Sometimes, boring is beautiful, because there is much greater risk in buying in emerging markets or commodities," said Tobias Levkovich, chief U.S. equity strategist for Citigroup.

"In addition, foreigners tend to favor buying big-cap U.S. companies they're familiar with, and hedge funds becoming larger in asset size will be increasing the market capitalization of their holdings."

Large stocks often are viewed as a haven when economic and political issues strain the financial markets. Yet not everyone is completely convinced that the stars will be aligned in their favor this year.

"If interest rates and risks continue to increase, large-cap stocks will benefit from it," said Steven Goldman, chief market strategist for Weeden & Co. "However, if we have a market where interest rates start behaving and the market doesn't take on a defensive tone, they may still lag."

Furthermore, the market leaders in the first part of the year historically have tended to be leaders for most of the year, Goldman added.

Diversifying among several different stock sizes makes the most sense for investors. Shifting in and out based on guesses about the future is dangerous.

Nonetheless, with the market capable of heart-stopping down days for stocks of all sizes, large-cap stocks with proven franchises do seem to offer more downside protection than the alternatives.

"Many investors had bought large-cap stocks at the worst time, the first quarter of 2000, and after two years of seeing them fail to perform with small- and mid-cap stocks, they gave up," Levkovich said.

"We've also seen people buying large caps last year and this year with similar results, but there is now a high probability that small- and mid-cap stocks will stop outperforming the large caps."

Andrew Leckey writes for Tribune Media Services.

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