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 30, 2020:
| Index | Stock Category | One Week Price Return |
| Barron’s 400 (B400) | GARP Stocks | -5.52% |
| Russell 1K | Large Cap Stocks | -5.71% |
| Russell 2K | Small Cap Stocks | -6.22% |
| S&P 500 | Large Cap Stocks | -5.64% |
Source: MarketGrader Research & FactSet.
Last week the equity markets were down. The Russell 1K posted a one-week loss of -5.71% while the Russell 2K posted a one-week loss of -6.22% implying a size spread of 51 basis points in favor of large caps for the week. The B400 index of GARP stocks ended the week with a loss of -5.52%.
The 251 large caps stocks in the B400 had a combined weight of 62.14% in the index at the start of the week, while the remaining 149 small cap stocks had a combined weight of 37.86%. A portfolio allocated in the R1K and R2K in those weights would have posted a loss of -5.90% for the week (-3.55% from the large cap allocation and -2.35% from the small cap allocation). But the B400 posted a loss of -5.52%, meaning the GARP based stocks selection last week again contributed a positive and significant alpha of 38 basis points. So even though the equity markets were down, GARP stocks outperformed the broad market.
| 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 | 62.14% | -3.55% |
| Small Cap Stocks | 149 | 37.86% | -2.35% |
| GARP Stock Selection | 0.38% | ||
| Total | 400 | 100% | -5.52% |
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 outperformed small caps last week by 51 basis points. Therefore, now large caps and smalls caps are tied at three weekly wins each over the past six weeks. With the B400’s GARP selection again adding a positive alpha of 38 basis points last week, the GARP selection has now added alpha in five of the six weeks.
| Size & Selection Performance | Total Number of Weeks Analyzed = 6 |
| Large Cap Stocks Outperformed | 3 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 six weeks that the B400 was reconstituted and rebalanced. The cumulative performance and attribution over the past six weeks is presented in the tables below. In the past week, large caps gave up all of the gains they had accumulated over the prior five weeks while small caps continue to be just above water. The R2K is in positive territory by just 11 basis points, while the R1K is in the red by -1.21% implying a small-cap premium of 1.32% over the past six weeks. With a total positive price performance of 1.08%, the B400 is outperforming both the size indexes. The cumulative performance contribution reveals that while the large cap factor is driving down the index, this outperformance is a consequence of the 1.80% alpha contribution that can be attributed to the GARP-based stock selection implemented by the B400 six weeks ago.
| Index | Stock Category | Six-Week Price Performance: September 21th Through October 30th |
| Barron’s 400 (B400) | GARP Stocks | 1.08% |
| Russell 1K | Large Cap Stocks | -1.21% |
| Russell 2K | Small Cap Stocks | 0.11% |
Source: MarketGrader Research & FactSet.
| Sources of Return | Number of Stocks in the B400 | Total Weight in the B400 on September 21th | Six-Week Price Performance Contribution: September 21th Through October 30th |
| Large Cap Stocks | 251 | 62.75% | -0.76% |
| Small Cap Stocks | 149 | 37.25% | 0.04% |
| GARP Stock Selection | 1.80% | ||
| Total | 400 | 100% | 1.08% |
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.
