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 2, 2020:
| Index | Stock Category | One Week Price Return |
| Barron’s 400 (B400) | GARP Stocks | 3.46% |
| Russell 1K | Large Cap Stocks | 1.75% |
| Russell 2K | Small Cap Stocks | 4.37% |
| S&P 500 | Large Cap Stocks | 1.52% |
Source: MarketGrader Research & FactSet.
Last week the broad market was up with both large cap stocks and small caps posting gains. The Russell 1K was up 1.75% and the Russell 2K was up 4.37% for a significant size spread of 2.62% in favor of small caps for the week. The B400 index of GARP stocks posted a gain of 3.46%.
Recall the B400 was reconstituted and rebalanced two weeks ago. Therefore, this is the second week that we are tracking the reconstituted index. The size attribution for the second week reveals that both the size categories contributed positive performance to the index but not enough to explain the performance of the B400 for the week. Looking at the breakdown of the B400 by size at the start of the week, a passive combination in large/small caps in the B400’s weights would have added 2.72% (the sum of 1.11% and 1.61%). This means that the GARP based stock selection implemented two weeks ago added an alpha of 75 basis points last week generating a total price increase for the B400 of 3.46%. A good 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 | 63.20% | 1.11% |
| Small Cap Stocks | 149 | 36.80% | 1.61% |
| GARP Stock Selection | 0.75% | ||
| Total | 400 | 100% | 3.46% |
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: Both large caps and small cap stocks posted gain last week with small caps significantly outperforming large caps. Unlike the first week of the newly reconstituted B400, the GARP selection was able to add an alpha 75 basis points last week. Here are the total weekly wins by size category and for GARP stocks.
| Size & Selection Performance | Total Number of Weeks Analyzed = 2 |
| Large Cap Stocks Outperformed | 1 week |
| Small Cap Stocks Outperformed | 1 week |
| GARP Based Stock Selection Added Alpha | 1 week |
Note: The above table was first conceived for the week starting September 21, 2020.
Cumulative Performance
Recall also from the blog entry last week we mentioned that we were going to present a cumulative performance and attribution for the reconstituted B400 index on a weekly basis. The reason for this is simple: though the week-by-week performance and attribution analyzes for the B400 is interesting, in that it allows readers to get a bird’s-eye view of the size and GARP performance of the US equity markets week-by-week, it should be kept in mind that the “week” is an arbitrary unit of analysis. What really matters for the B400 is the performance of the index over its entire buy-and-hold period, which in our case is 26 weeks (the B400 index reconstitutes semi-annually). So, the cumulative performance and attribution allows the reader to keep a running tab over the entire time that has passed in this 26-week period.
Keep that in mind, the cumulative performance and attribution over the past two weeks is presented in the tables below. Since its reconstitution, the B400 is outperforming both the large and small size categories as presented by the size indexes. This outperformance is a consequence of the 58 basis points of alpha that the GARP-based stock selection has added over this two-week period.
| Index | Stock Category | Two-Week Performance: Starting September 21th Through October 3rd |
| Barron’s 400 (B400) | GARP Stocks | 1.35% |
| Russell 1K | Large Cap Stocks | 1.12% |
| Russell 2K | Small Cap Stocks | 0.16% |
Source: MarketGrader Research & FactSet.
| Sources of Return | Number of Stocks in the B400 | Total Weight in the B400 on September 21th | Two- Week Performance Contribution: Starting September 21th Through October 3rd |
| Large Cap Stocks | 251 | 62.75% | 0.70% |
| Small Cap Stocks | 149 | 37.25% | 0.06% |
| GARP Stock Selection | 0.58% | ||
| Total | 400 | 100% | 1.35% |
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.
