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September 21, 2013

Lipper Insight: Small-Cap and Mid-Cap Funds Outperform Large-Cap Funds During the U.S. Stock Market Recovery

by Lipper Alpha Insight.

In our last article–posted September 7–we looked at the outperformance of small-cap/mid-cap stock indices versus the performance of large-cap indices. In particular, we compared the S&P 600 and 400 against the S&P 500. We saw that the outperformance of the mid-cap and small-cap indices came about from their concentrated exposure to consumer cyclicals and industrials. We noted that the large-cap index had no real concentration among the sectors. Instead, it had somewhat even exposure to all sectors. We asked at the end of the article if the outperformance of small- and mid-caps was also true for small- and mid-caps funds.

In Figure 1 we show that indeed small-and mid-cap funds did outperform large-cap funds.

Figure 1. Cumulative Return on US$10,000, March 2009–August 2013


Source: Lipper

As the graph shows, after the first 12 months of the market recovery, small- and mid-cap funds were starting to pull away from large-cap funds. By the end of August 2013 the small- and mid-cap funds had increased 2.7 times in value, while large-cap funds had increased 2.3 times. That was certainly not shabby performance by the large-caps, but the graph shows the underperformance of large-caps versus small- and mid-caps was consistent during the last four-plus years. This was again evidence that the small-/mid-cap cycle noted in the September 7 article was in play.

 What were small- and mid-caps invested in that helped their outperformance? Below is a returns-based style analysis (RBSA) chart that shows the relative concentration of the mid-cap index.

Figure 2: Mid-Cap Funds’ RBSA Rolling-Period Investments, 2010–2013

rbsa funds

As can be seen, mid-cap funds had significant exposure was to consumer cyclicals and industrials. These two sectors had the third and fourth best returns on a cumulative basis for the recovery period. And these two sectors represented nearly 45% of the mid-cap funds’ sector exposure on average.

The large-cap funds, like their large-cap index sister, had a much more even exposure to all sectors, with exposure percentages ranging between 4% and 17%. Clearly, the concentration of the mid-cap funds (and this was true for small-caps as well) helped power the outperformance of these funds over the large-cap funds.

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