Large caps enticing

BOSTON – As markets continue to founder, conventional wisdom suggests the place to be once a turnaround takes hold is in stocks of small companies.

History shows that typically volatile small-cap stocks are “first in, first out” – they run into trouble first when markets begin faltering, then outperform large companies when things get back on track.

But many mutual fund managers warn against taking that as gospel truth this time around.

If the market does eventually gain traction for a sustained comeback, large-cap stocks are more likely to offer a decent return for years to come, the contrarians say. They cite an apparent shift from a nearly decade-long cycle in which investors held small-caps – generally defined as companies with a market value of $300 million to $2 billion – in greater favor than large-caps. The large company Standard & Poor’s 500 index has lost an average 2.6 percent per year over the past 10 years, compared with an average annual gain of 3.9 percent for the S&P Small Cap 600 index.

“Small-caps seems to have had their relative day in the sun during the first half of this decade, and valuation currently favors large-caps,” said Robert Sharps, who manages growth stock portfolios for T. Rowe Price’s institutional clients.

One of T. Rowe Price’s other large-cap managers, Larry Puglia of the $7 billion Blue Chip Growth Fund (TRBCX), says large companies are in better shape even if a sustained turnaround doesn’t happen anytime soon and credit markets remain tight. Puglia cites large company attributes he thinks will be strengths: product and geographic diversity, and greater financial resources that leave large companies less reliant on financing when credit is hard to come by.

“It’s fair to say small companies are more dependent on the banking system,” Puglia said.

It may be unsurprising that large-cap fund managers are more bullish on large-caps than small-caps these days. But some who manage money across both categories are giving larger companies an edge.

Uri Landesman, head of global growth at ING Investment Management, noted that small-cap stocks haven’t performed worse than large-caps so far in this bear market, contrary to what normally happens in a downturn. The S&P 500 was down about 49 percent from its Oct. 9, 2007, peak through Wednesday’s close. During that span, the small company Russell 2000 index is also down 49 percent. And so far this year, there’s also little difference in the performance of the indicies, both down around 13 to 15 percent.

So Landesman reasons large-caps have more room to rebound, particularly in tight credit markets that can hurt smaller companies more dependent on borrowed cash.

Large corporations “are going to have access to what little liquidity exists in the system,” said Landesman, who declined to say whether ING Investment Management is shifting into large-company stocks.