Did Someone Order a Large?

Any committee member sitting through their share of plan investment review meetings has heard the term “large cap” come up quite frequently. In our experience, large cap funds are top of list when the review turns to the stand-alone funds in the lineup.  Given this place of prominence, it is critical to ponder its definition, its importance and how they can be utilized best in an efficient, participant-friendly manner within plan investment lineups.

Large cap is an abbreviation of “large capitalization” which refers to the market capitalization of a public company with a market value (number of shares outstanding multiplied by stock price) greater than $20 billion.  On the upper end, the market cap of the very largest stocks reaches into hundreds of billions of dollars.  The largest of large cap stocks are household names such as Apple (topping the list of largest U.S. public companies with a market capitalization of $730 billion¹), Microsoft ($498 billion¹), Amazon ($403 billion¹), Facebook ($398 billion¹), Exxon Mobil ($343 billion¹), Wells Fargo ($293 billion¹), and Walt Disney ($175 billion¹).

Because of their size, large caps collectively comprise the majority of total stock market capitalization even while representing only a small number of individual stocks (approximately 200) out of the thousands of publicly listed companies.  For this reason large cap stocks represent a prominent role within most equity allocations whether part of a broad asset allocation fund like a target date fund or via a mix of the stand-alone funds in a plan lineup.

Now that we defined a stock as a large cap, it’s a straight forward extension that the large cap funds in a lineup hold investment positions in these large companies.  They follow different strategies referred to as value, growth or blend and each of these may be actively or passively managed.

Value funds invest in stocks deemed “out of favor” or “cheap” (based on dividend yield, price-to-earnings, or price-to-book value, etc.). Growth funds invest in stocks of companies with higher earnings opportunities. Financials, Energy, Telecommunications and Utilities are sectors of the market traditionally associated with value while sectors such as Information Technology and Health Care are considered with growth.   Blend funds predictably include both value and growth, and are aimed at offering a broad exposure across large capitalization stocks. The benchmark against the broad-based Russell 1000 Index contains the stocks found both in the Russell 1000 Value and Russell 1000 Growth Indices.

From a design perspective, both value and growth deserve a place in the lineup.  Efficient and effective large cap includes and rounded out by a low-cost, passively managed index fund in the large cap blend category. We believe these guidelines constitute best practices of retirement portfolio construction.

1. As of 03/03/2017

The opinions expressed in this commentary are those of the author. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney or tax advisor with regard to your individual situation. Comments concerning the past performance are not intended to be forward looking and should not be viewed as an indication of future results.

All investments involve varying levels and types of risks. These risks can be associated with the specific investment, or with the marketplace as a whole. Loss of principal is possible.

Russell 1000® Growth Index measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values.

Russell 1000® Value Index measures the performance of those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values.

ACR#235723 03/17