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The Barron’s 400: GARP vs. Size – Week Ending October 23rd

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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 October 23, 2020:

Index Stock Category One Week Price Return
Barron’s 400 (B400) GARP Stocks -0.07%
Russell 1K Large Cap Stocks -0.55%
Russell 2K Small Cap Stocks 0.41%
S&P 500 Large Cap Stocks -0.53%

Source: MarketGrader Research & FactSet.

Last week, large cap stocks were down and small cap stocks were up. The Russell 1K posted a loss of -0.55% while the Russell 2K posted a gain of 0.41% implying a size spread of 96 basis points in favor of small caps for the week. The B400 index of GARP stocks suffered a small loss of seven basis points.

The 251 large caps stocks in the B400 had a combined weight of 62.50% in the index at the start of the week, while the remaining 149 small cap stocks had a combined weight of 37.70%. A portfolio allocated in the R1K and R2K in those weights would have had a negative contribution of 34 basis points from the large cap allocation and a positive contribution of 15 basis points from the small cap allocation, for a net negative return of 19 basis points. But the B400 was down only seven basis points, meaning the GARP based stocks selection once again contributed a positive alpha of 12 basis points. Another up week for GARP stocks.

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 62.30% -0.34%
Small Cap Stocks 149 37.70% 0.15%
GARP Stock Selection 0.12%
Total 400 100% -0.07%

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: Small caps outperformed large caps gain last week by 96 basis points. Therefore, smalls caps have outperformed large caps in three of the past five weeks. With the B400’s GARP selection again adding a positive alpha of 12 basis points last week, the GARP selection has now added alpha in four of the past five weeks.

Size & Selection Performance Total Number of Weeks Analyzed = 5
Large Cap Stocks Outperformed 2 weeks
Small Cap Stocks Outperformed 3 weeks
GARP Based Stock Selection Added Alpha 4 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 five weeks that the B400 was reconstituted and rebalanced. The cumulative performance and attribution over the past five weeks is presented in the tables below. Over this time period, small caps have outperformed large caps. The R2K has gained 6.75% and the R1K has gained 4.78% implying a small-cap premium of 1.97% over the past five weeks. With a total price performance of 6.99%, the B400 is outperforming both the size indexes. The cumulative performance contribution reveals that this outperformance is a consequence of the 1.47% of positive alpha that can be attributed to the GARP-based stock selection implemented by the B400 five weeks ago.

Index Stock Category Five-Week Price Performance: September 21th Through October 23rd
Barron’s 400 (B400) GARP Stocks 6.99%
Russell 1K Large Cap Stocks 4.78%
Russell 2K Small Cap Stocks 6.75%

Source: MarketGrader Research & FactSet.

Sources of Return Number of Stocks in the B400 Total Weight in the B400 on September 21th Five-Week Price Performance Contribution: September 21th Through October 23rd
Large Cap Stocks 251 62.75% 3.00%
Small Cap Stocks 149 37.25% 2.51%
GARP Stock Selection 1.47%
Total 400 100% 6.99%

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.

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