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 6, 2020:
| Index | Stock Category | One Week Price Return |
| Barron’s 400 (B400) | GARP Stocks | 6.40% |
| Russell 1K | Large Cap Stocks | 7.50% |
| Russell 2K | Small Cap Stocks | 6.87% |
| S&P 500 | Large Cap Stocks | 7.32% |
Source: MarketGrader Research & FactSet.
Equity markets had a stellar week with both large caps and small caps posting solid gains. The Russell 1K posted a gain of 7.50% while the Russell 2K posted gain of 6.87%, implying a size spread of 63 basis points in favor of large caps for the week. The B400 index of GARP stocks ended the week with a solid gain of 6.40%.
The 251 large caps stocks in the B400 had a combined weight of 62.21% in the index at the start of the week, while the remaining 149 small cap stocks had a combined weight of 37.79%. A portfolio allocated in the R1K and R2K in those weights would have posted a gain of 7.27% for the week (4.67% from the large cap allocation and 2.60% from the small cap allocation). But the B400 posted a gain of 6.40%, meaning the GARP based stock selection last week contributed a negative alpha of 86 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 | 62.21% | 4.67% |
| Small Cap Stocks | 149 | 37.79% | 2.60% |
| GARP Stock Selection | -0.86% | ||
| Total | 400 | 100% | 6.40% |
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: Equity markets had a stellar performance for the week. Large caps outperformed small caps last week by 63 basis points. Large caps, with four weekly wins, now overtake small caps with three weekly wins over the past seven weeks. With the B400’s GARP selection failing to add alpha last week, the GARP selection has now added alpha in five of the past seven weeks.
| Size & Selection Performance | Total Number of Weeks Analyzed = 7 |
| Large Cap Stocks Outperformed | 4 weeks |
| Small Cap Stocks Outperformed | 3 weeks |
| GARP Based Stock Selection Added Alpha | 5 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 seven weeks that the B400 was reconstituted and rebalanced. The cumulative performance and attribution over the past seven weeks is presented in the tables below. The last week has put large caps in the green again for a cumulative price gain of 6.20%. However, over the past seven weeks, they still trail small caps, which have posted a cumulative gain of 6.99% implying a small cap premium of 79 basis points over the period. With a cumulative price performance of 7.55%, the GARP-focused B400 is outperforming both the size indexes since the rebalance.
| Index | Stock Category | Seven-Week Price Performance: September 21th Through November 6th |
| Barron’s 400 (B400) | GARP Stocks | 7.55% |
| Russell 1K | Large Cap Stocks | 6.20% |
| Russell 2K | Small Cap Stocks | 6.99% |
Source: MarketGrader Research & FactSet.
The cumulative performance attribution by size reveals that in addition to the contribution of large caps and small caps, 1.06% of the B400’s return can be attributed to the GARP-based stock selection implemented by the B400 seven weeks ago. That is about 14% (1.06% of 7.55%) of the B400’s cumulative price performance over this period.
| Sources of Return | Number of Stocks in the B400 | Total Weight in the B400 on September 21th | Seven-Week Price Performance Contribution: September 21th Through November 6th |
| Large Cap Stocks | 251 | 62.75% | 3.89% |
| Small Cap Stocks | 149 | 37.25% | 2.60% |
| GARP Stock Selection | 1.06% | ||
| Total | 400 | 100% | 7.55% |
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.
