Does Size Trump Style?

June 05, 2009

Small-caps are outperforming again. But value's back in large-caps. So what's the trade-off when allocating between size and style?


(Editor's note: The following is the final report of a two-part series analyzing performance characteristics of U.S. stock markets by style and size during the current three-month rally. The first installment, “A Different Sort Of Rally,” can be found here.)


A rebounding stock market is rewarding all types of investors. But some are profiting more than others.

The rally has been much more discriminating in terms of market-cap sizes than styles. For example, from March 9 (when the current rally began) through June 1, small-cap value stocks in the Russell 2000 Value Index have outperformed their Russell large-cap value peers by 7.14 percentage points.

Using the same set of Russell benchmarks as a proxy for the broad U.S. market, small-caps also have dominated of late on the growth side. In that matchup, the Russell 2000 Growth Index is leading the large-cap Russell 1000 Growth Index by 11.32 percentage points over the past three months.

As a result, investing in growth stocks has proved more beneficial for portfolios slanted toward smaller-cap names. On the value side, the differences between market-cap sizes were noticeable but not as pronounced.

Small-Caps Surge Ahead

No matter which style is chosen, however, small-caps have charged ahead of large-caps in this up cycle. Taking a blended approach, the Russell 2000 has surged ahead of the much bigger Russell 1000 by 9 percentage points through June 1. By contrast, from 2008 through March 6 (just before the current rebound in stocks), the style-neutral indexes showed large-caps outperforming by slightly more than 1 percentage point.



Rally (%)

YTD (%)

12-Mnth (%)

3-Yr (%)

5-Yr (%)

10-Yr (%)

15-Yr (%)

Russ 1000








Russ 2000








Diff (pts)









In a head-to-head study of styles within the same cap sizes, value has been the clear winner in this rally. (See part one of this series here.) Likewise, small has soundly beaten large in terms of cap sizes. And size has generated a bigger cushion than style during this up cycle.

But asset allocators tempted to tweak their portfolios toward more small-caps would have to show remarkable timing to capture the entire 9-percentage point advantage.

Take what would’ve happened if someone had invested in an exchange-traded fund such as the iShares Russell 2000 Index (NYSE: IWM). A purchase at the start of 2009 and held through March 6 would’ve lost almost 5 percentage points more than a similar investment in the iShares Russell 1000 Index (NYSE: IWB). Even if IWM would’ve been held through the initial 30 days of the rebound, the ETF’s returns still would’ve trailed IWB’s by more than a half-percentage point.

The longer-term past-performance records shown above indicate that small-caps tend to eventually provide a performance cushion over large-cap stocks. However, the greater risk inherent in small-caps can make that road to improved fortunes somewhat rocky. Consider that in the past three years through June 1, IWB would’ve outperformed IWM by about 1.5 percentage points.

In the first part of this report, a preference for value during the current rally has produced a 7-plus percentage point advantage in large-caps. In small-caps, that gap was narrower. Contrast that performance cushion for large-cap value with a 9-point style-neutral lead for small-caps.

In either case, this market recovery is offering opportunities for investors to capture overstated gains by taking a potentially more-volatile approach by overweighting smaller names. But it’s also providing a chance for long-term-oriented investors to court less volatility by keeping their large-to-small allocations in place. By tweaking among styles, particularly in large-caps, the ongoing rally appears to provide a possibly improved risk-adjusted means to capture more of the broad market’s upside.



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