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 25, 2020:
| Index | Stock Category | One Week Price Return |
| Barron’s 400 (B400) | GARP Stocks | -2.05% |
| Russell 1K | Large Cap Stocks | -0.63% |
| Russell 2K | Small Cap Stocks | -4.03% |
| S&P 500 | Large Cap Stocks | -0.63% |
Source: MarketGrader Research & FactSet.
Last week large cap stocks were down for the fourth consecutive week and small cap stocks posted even greater losses. The Russell 1K was down -0.63% and the Russell 2K was down -4.03% for a significant size spread of 3.40% in favor of large caps for the week. The B400 index of GARP stocks posted a loss of -2.05%.
Recall from last week’s blog entry, the B400 index was reconstituted and rebalanced at the close of the prior week and the updated index went into effect at the market’s open last week. You can find more on this reconstitution and rebalance here. Consequently, last week was the first one-week performance for the newly reconstituted and rebalanced index.
The large/small composition of the newly reconstituted index indicates that the recent version of the index selected fewer large cap stocks (251 versus 270 for the prior version) and therefore more small cap stocks (149 versus 130 for the prior version). It might be worth repeating here that this large/small size allocations for the B400 are an outcome of the bottom-up stock selection implemented using MarketGrader’s proprietary GARP-focused methodology. These size allocations are not an outcome of a top-down asset allocation framework.
The size attribution for the first week of the reconstituted index reveals that both the size categories contributed negative performance to the index. However, the GARP based stock selection was unable to erase some of the losses and contributed an additional 15 basis points to the B400 decline for the week.
| 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 | 62.75% | -0.39% |
| Small Cap Stocks | 149 | 37.25% | -1.50% |
| GARP Stock Selection | -0.15% | ||
| Total | 400 | 100% | -2.05% |
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 declined last week, but small cap stocks declined even more, therefore making it the week a win for the large cap category. The GARP selection was unable to add alpha. Starting with last week’s returns, here are the cumulative weekly wins by size category and for GARP stocks since B400’s most recent rebalance.
| Size & Selection Performance | Total Number of Weeks Analyzed = 1 |
| Large Cap Stocks Outperformed | 1 weeks |
| Small Cap Stocks Outperformed | 0 weeks |
| GARP Based Stock Selection Added Alpha | 0 weeks |
Note: The above table was first conceived for the week starting September 21, 2020.
Cumulative Performance
In our final blog for the previous version of the B400 last week, we presented a cumulative performance and attribution for the index over a 10-week period (i.e., since the inception of this blog). We heard from readers that they really appreciated seeing the performance and attribution both on a weekly and cumulative basis. Therefore, starting next week we will include the prior week’s performance and attribution by size and GARP (to see how the equity markets fared in that particular week) along with the cumulative performance and attribution by size and GARP to keep a running tally on how the B400 is holding up over the entire period.
