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 September 11, 2020:
| Index | Stock Category | One Week Price Return |
| Barron’s 400 (B400) | GARP Stocks | -1.83% |
| Russell 1K | Large Cap Stocks | -2.55% |
| Russell 2K | Small Cap Stocks | -2.48% |
| S&P 500 | Large Cap tocks | -2.51% |
Source: MarketGrader Research & FactSet.
Similar to the week before, the broad market once again posted losses last week irrespective of size category: The Russell 1K was down -2.55% and the Russell 2K was down -2.48% for a small but relevant size spread of seven basis points (over four trading days) in the favor of small caps. The B400 index of GARP stocks posted a loss of -1.83%.
In a market primarily driven by the performance of mega/large cap stocks, it is virtually impossible for stock selection to add alpha to a portfolio. The only portfolios that outperform in such a market are those that are overweight the mega/large cap stocks. Or in other words, portfolios that are taking heavy bets on the mega/large size segment of the market. But in the past two weeks the broad market has posted back to back losses, thereby providing an opportunity for portfolios deploying stock selection to add value.
Indeed, whereas both large and small cap stocks posted losses last week, the GARP focused B400 was able to significantly limit the size of the loss. Note, the B400 started the week comprised of 67.05% of large caps and 32.95% of small caps. Now a portfolio holding that mix of the R1K and R2K respectively, would experience a loss of exactly -2.53% (-1.71% from the R1K holding and -0.82% from the R2K holding). But the B400 lost only -1.83%. This means that the B400 generated an alpha of 70 basis points. This alpha can be attributed to the rules-based and transparent stock selection methodology that the B400 employs semi-annually to reconstitute and rebalance the index. [On a separate note, the B400 will be implementing a reconstitution and rebalance at the market close of this week, which will take effect on the market open of next week.]
| Sources of Return | Number of Stocks in the B400 | Total Starting Weight in the B400 | Contribution to B400 Return |
| Large Cap Stocks | 270 | 67.05% | -1.71% |
| Small Cap Stocks | 130 | 32.95% | -0.82% |
| GARP Stock Selection | 0.70% | ||
| Total | 400 | 100% | -1.83% |
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: The broad market has now experienced two consecutive down weeks. Last week small caps outperformed large caps by seven basis points. In addition, the B400 was able to limit losses with the GARP based stock selection adding an alpha of 70 basis points. Here are the cumulative weekly wins by size category and for GARP stocks.
| Size & Selection Performance | Total Number of Weeks Analyzed = 9 |
| Large Cap Stocks Outperformed | 6 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 July 10, 2020.
