Using the Barron’s 400 Index as a proxy for a portfolio holding GARP companies, the GARP vs. Size blog is a weekly summary of the performance of US equity markets aimed at informing readers the alpha that is attainable using a GARP focused stock picking strategy. Readers might want to take note that the Barron’s 400 uses a rules-based, transparent and objective methodology for selecting GARP stocks. It is not an actively managed portfolio.
The table below presents the one-week price performance of the US equity markets ending November 27, 2020:
| Index | Stock Category | One Week Price Return |
| Barron’s 400 (B400) | GARP Stocks | 2.35% |
| Russell 1K | Large Cap Stocks | 2.55% |
| Russell 2K | Small Cap Stocks | 3.92% |
| S&P 500 | Large Cap Stocks | 2.27% |
Source: MarketGrader Research & FactSet.
The Thanksgiving week was a good week for equity markets. Over the four trading days of the week, the Russell 1K index of large cap stocks posted a gain of 2.55% while the Russell 2K index of small cap stocks posted a gain of 3.92%, meaning small caps outperformed large caps by 1.37%. The B400 index of GARP stocks ended the week with a gain of 2.35%.
In terms of the one-week size attribution, the 251 large cap stocks in the B400 had a combined weight of 61.43% in the index at the start of the week, while the remaining 149 small cap stocks had a combined weight of 38.57%. A portfolio allocated to the R1K and R2K in those weights would have posted a gain of 3.08% for the week (a contribution of 1.57% from the large cap allocation and 1.51% from the small cap allocation). But the B400 posted a gain of 2.35%, meaning the GARP based stock selection last week contributed a negative alpha of 73 basis points.
| Sources of Return | Number of Stocks in the B400 | Total Starting Weight in the B400 | One Week Contribution to B400 Return |
| Large Cap Stocks | 251 | 61.43% | 1.57% |
| Small Cap Stocks | 149 | 38.57% | 1.51% |
| GARP Stock Selection | -0.73% | ||
| Total | 400 | 100% | 2.35% |
Source: MarketGrader Research. The contribution for large cap stocks is calculated as the total weight in large Cap stocks times the return of the Russell 1K. The contribution for small cap stocks is calculated similarly. The total price return of the B400 that is not accounted for by the size contributions is attributed to stock selection using GARP, namely, the methodology employed by the B400.
Conclusion: Large caps were up for the week by 2.55% but small caps did better once again, outperforming large caps by 1.37%, for a total gain of 3.92% for the week. Small caps have now outperformed large caps in six of the last 10 weeks. With the B400’s GARP based stock selection contributing a negative alpha last week, the GARP selection has added positive alpha in six of the past 10 weeks.
| Size & Selection Performance | Total Number of Weeks Analyzed = 10 |
| Large Cap Stocks Outperformed | 4 weeks |
| Small Cap Stocks Outperformed | 6 weeks |
| GARP Based Stock Selection Added Alpha | 6 weeks |
Note: The above table was first conceived for the week starting September 21, 2020, when the B400 was reconstituted and rebalanced.
Cumulative Performance
It has been 10 weeks that the B400 was reconstituted and rebalanced. The cumulative performance and attribution over this 10-week period is presented in the tables below. Both large caps and small caps are in solidly positive territory with the R1K up 10.78% and the R2K up 20.72% implying a small cap premium of 9.94% over this 10-week period. With a cumulative price gain of 14.06%, the performance of the GARP-focused B400 is about in the middle of the size indexes.
| Index | Stock Category | 10-Week Price Performance: September 21th Through November 27th |
| Barron’s 400 (B400) | GARP Stocks | 14.06% |
| Russell 1K | Large Cap Stocks | 10.78% |
| Russell 2K | Small Cap Stocks | 20.72% |
Source: MarketGrader Research & FactSet.
In terms of the 10-week size attribution, a passive allocation to the large and small cap indexes in the B400’s starting large/small weights would have resulted in a return of 14.48% (a contribution of 6.76% from the large cap allocation and 7.72% from the small cap allocation). Since the B400 is up 14.06%, this means that the GARP-based stock selection implemented by the B400 nine weeks ago has now contributed a negative alpha of 42 basis points. This is the first time since the rebalance that the cumulative alpha contribution is in the red. Given that the B400 is reconstituted and rebalanced semi-annually, each portfolio is held for a total of 26 weeks. Therefore, this B400 portfolio still has 14 weeks to go until the next rebalance and is not even halfway into its buy-and-hold life.
| Sources of Return | Number of Stocks in the B400 | Total Weight in the B400 on September 21th | 10-Week Price Performance Contribution: September 21th Through November 27th |
| Large Cap Stocks | 251 | 62.75% | 6.76% |
| Small Cap Stocks | 149 | 37.25% | 7.72% |
| GARP Stock Selection | -0.42% | ||
| Total | 400 | 100% | 14.06% |
Source: MarketGrader Research. The contribution for large cap stocks is calculated as the total weight in large Cap stocks times the return of the Russell 1K. The contribution for small cap stocks is calculated similarly. The total price return of the B400 that is not accounted for by the size contributions is attributed to stock selection using GARP, namely, the methodology employed by the B400.
