Course 208: Examining a Stock Fund's Portfolio, Part 2
Average Market Capitalization
In this course
1 Introduction
2 Sector Weightings
3 Average Market Capitalization
4 Price/Earnings and Price/Book Ratios
5 Number of Holdings
6 Turnover Rates

So average market capitalization is included in Morningstar's style box calculation. But you should examine it anyway because there are small-cap funds and there are really small-cap funds.

Take Diamond Hill Small Cap (DHSCX) and Aegis Value (AVALX), for example. Both land in the small-cap value portion of the style box. But despite its small-sounding name, Diamond Hill Small Cap sports an average market cap of over $2 billion, while Aegis Value's managers consistently buy tiny firms for a portfolio with an average market cap of $317 million (as of February 2011). That's an enormous difference. That means that Aegis Value will do well against other small-value funds when micro-caps are doing well in the market. Of course, it also lags when investors get nervous and flock to larger, more established firms. Investors who aren't aware of the fund's bias might evaluate the fund as good or bad without understanding the reason behind its performance.

Conversely, there's a difference between large-cap and really large-cap funds. Vanguard Growth Index (VIGRX), for instance, carried an average market capitalization of $36.5 billion in March 2011, while William Blair Growth BGFIX clocked in at just $14.5 billion. While both are large-cap growth funds, the former fund will outperform the latter when giant-sized companies are leading the market. Conversely, the latter fund should one-up the former if smaller companies (well, small within the large-cap division) have the lead.

Next: Price/Earnings and Price/Book Ratios >>


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