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 November 13, 2020:
| Index | Stock Category | One Week Price Return |
| Barron’s 400 (B400) | GARP Stocks | 2.81% |
| Russell 1K | Large Cap Stocks | 1.94% |
| Russell 2K | Small Cap Stocks | 6.08% |
| S&P 500 | Large Cap Stocks | 2.16% |
Source: MarketGrader Research & FactSet.
Equity markets had an up week with both large caps and small caps posting gains. The Russell 1K posted a gain of 1.94% while the Russell 2K posted a gain of 6.08%. Small caps outperformed large caps by 4.14% last week, a very significant margin. The B400 index of GARP stocks ended the week with a gain of 2.81%.
The 251 large caps stocks in the B400 had a combined weight of 62.78% in the index at the start of the week, while the remaining 149 small cap stocks had a combined weight of 37.22%. A portfolio allocated in the R1K and R2K in those weights would have posted a gain of 3.48% for the week (1.22% from the large cap allocation and 2.26% from the small cap allocation). But the B400 posted a gain of 2.81%, meaning the GARP based stock selection last week contributed a negative alpha of 67 basis points.
| 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 | 62.78% | 1.22% |
| Small Cap Stocks | 149 | 37.22% | 2.26% |
| GARP Stock Selection | -0.67% | ||
| Total | 400 | 100% | 2.81% |
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: Equity markets were up for the week with small caps outperforming large caps by 4.14% for the week. Over the last eight weeks, large caps and small caps are now tied with four weekly wins each. With the B400’s GARP selection failing to add alpha last week, the GARP selection has now added alpha in five of the past eight weeks.
| Size & Selection Performance | Total Number of Weeks Analyzed = 8 |
| Large Cap Stocks Outperformed | 4 weeks |
| Small Cap Stocks Outperformed | 4 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 eight weeks that the B400 was reconstituted and rebalanced. The cumulative performance and attribution over the past eight weeks are presented in the tables below. Both large caps and small caps are in solidly positive territory with the R1K up 8.26% and the R2K up 13.49% implying a small cap premium of 5.23% over the period. With a cumulative price gain of 10.57%, the performance of the GARP-focused B400 about in the middle of the size indexes.
| Index | Stock Category | Eight-Week Price Performance: September 21th Through November 13th |
| Barron’s 400 (B400) | GARP Stocks | 10.57% |
| Russell 1K | Large Cap Stocks | 8.26% |
| Russell 2K | Small Cap Stocks | 13.49% |
Source: MarketGrader Research & FactSet.
The cumulative performance attribution by size reveals that in addition to the 5.19% and 5.02% contribution of large caps and small caps respectively, 0.36% of the B400’s return can be attributed to the GARP-based stock selection implemented by the B400 eight weeks ago. That is a little more than 3% (0.36% of 10.57%) of the B400’s cumulative price performance over this period.
| Sources of Return | Number of Stocks in the B400 | Total Weight in the B400 on September 21th | Eight-Week Price Performance Contribution: September 21th Through November 13th |
| Large Cap Stocks | 251 | 62.75% | 5.19% |
| Small Cap Stocks | 149 | 37.25% | 5.02% |
| GARP Stock Selection | 0.36% | ||
| Total | 400 | 100% | 10.57% |
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.
