Who Says Size Doesn’t Count?

Never before has such a wide gulf existed between the returns of mutual funds that invest in large company stocks and those that own small company stocks.

For proof, take a look at the three-year performance of two of Vanguard Group’s “index” funds.

The $39 billion Vanguard 500-Index Portfolio, which mimics Standard & Poor’s 500 Index, has generated higher returns than 97 percent of 1,552 U.S. diversified stock funds tracked by Kanon Bloch Carre, a retirement plan consulting firm, since May 1994.

By contrast, the $1.9 billion Vanguard Small Capitalization Stock Fund, which tracks the Russell 2000 Index, the benchmark for small company stocks, ranked a dismal No. 1,115 of 1,552 diversified stock funds in the three-year period ended April 30, said William Dougherty, who heads Boston-based Kanon Bloch Carre.

“It was the worst three-year stretch ever for managers who invest outside the S&P 500,” Dougherty said.

The Vanguard Small Cap fund rose at annual clip of 17.28 percent in the three-year period ended Friday, while the Vanguard 500-Index Portfolio advanced at an annual rate of 25.64 percent, according to Bloomberg Fund Performance.

Not only is the performance of the Small Cap fund lagging, but it’s also a tougher portfolio to manage than the Vanguard 500 fund, said Gus Sauter, head of Vanguard’s $75 billion quantitative equity group.

The Russell 2000 Index is comprised of 2,000 stocks. About 400 to 500 of the stocks in the index are changed each June, which means Sauter’s group must buy and sell a bunch of stocks. Many of the stocks are “illiquid,” meaning it’s sometimes difficult to trade the stocks at advantageous prices.

“We try to avoid the illiquid stocks and that means our fund holds about 1,500 stocks rather than 2,000 stocks,” Sauter said. “As a result, our fund isn’t a precise replica of the Russell 2000 Index.”

The Vanguard fund is doing better than most “aggressive growth” stock funds this year, ranking No. 198 of 477, according to Kanon Bloch Carre. The fund was up 4.5 percent as of Friday, while the Russell 2000 was up 3.6 percent and the S&P 500 was up 14.4 percent.