Small-cap standbys

NEW YORK – Though it might appear to run counter to logic in a place that can be as bruising and unforgiving as Wall Street, bigger has not always been better. But with large capitalization stocks emerging from a five-year slump, such bumper-sticker logic might be in order for many mutual fund investors.

While many analysts see a move toward large cap funds, fewer appear to be suggesting investors give up on small cap funds.

Brian Gendreau, investment strategist at ING Investment Management, expects large cap funds to outperform, but he doesn’t expect small caps to necessarily decline in value. Nonetheless, the $10 billion in funds affected by ING’s allocation decisions have in recent months shifted to become overweight in large cap stocks and underweight in small caps.

“The reason we’re overweight in large caps is just because after 17 quarters of double-digit earnings growth, they’ve gotten cheaper than they were,” Gendreau said.

Todd Trubey, an analyst at Morningstar, which rates mutual funds, sees the split as less of a debate between large versus small than between value and growth.

He notes that the top performing fund categories this year have been large cap value funds followed by small cap value funds. With small cap value funds, about half the gains for the year have come in the past three months, while for small growth funds nearly all the gains have occurred over that time span.

Through the end of last week, small cap value funds are up 10.9 percent for the year to date, while small cap growth funds are up 5.8 percent, Trubey said.

“What everyone seems to be arriving at now is that large caps could outperform,” he said, noting that such an occurrence wouldn’t necessarily sound the death knell for small caps. “They have the potential just to lag. It’s just a prognostication,” he said of the calls for a further resurgence in large caps.

“The real thing is trying to figure out whether a small cap fund is still a reasonable, long-term investment. Just because an area has outperformed over a multiyear period doesn’t mean it’s become overvalued.”

Gendreau is unconvinced. He said ING is essentially neutral when it comes to value stocks versus growth stocks, as the company’s models show growth stocks only slightly outperforming value stocks.

Money manager Mary Lisanti acknowledges that she holds a contrarian view on small caps, advocating that they will fare better than large caps. But she argues that as someone who has followed small caps since 1978, she has seen investors incorrectly count them out before. She believes the recent run-up in large caps is due to fade.

Lisanti oversees the Adams Harkness Small Cap Growth fund, which is up 2 percent for the year. Last year, the fund, which has assets of about $30 million, returned 14.2 percent.