Grouping And Categorizing
Funds are typically grouped or categorized by their size for easier analysis and to make it easy to compare mutual funds. Investors seeking mutual fund advice will also find out these categorizations make it easier to discuss ideas and strategies.
There are thousands so in depth individual analysis even with the help of a mutual fund screener is impractical if not impossible. Categorization allows quick profiling and generalization to ease decision-making. Large cap mutual funds are a category defined by their capitalization, a measure of the size of the company in terms of its net worth and assets. Some analysts say that companies which exceed $8 billion should be considered large cap.
The Standard And Poor 500
The most famous of all large cap mutual funds is the S&P 500 index, or the Standard and Poor 500 index. It is a group of the top 500 large cap companies, the composition of which constantly changes over time as companies grow or shrink. A great number of brokerages and mutual fund companies offer investments that mimic the composition of the S&P 500. Companies like the fast food conglomerate McDonald’s, the chip maker Intel Corp, the business consulting firm IBM, and the retailer Target Corp are all part of the S&P 500 index.
Low Volatility
One observation is that the large cap mutual funds tend to be less volatile, with lower beta and risk profiles, than mid and small cap stocks. Though if compared to very stable products like top money market funds, the volatility is great. This can be rationalized easily by considering that the largest companies achieved their positions through strong, consistent growth. Smaller ones are still in their growth stage, trying out different new strategies and testing new ground. An investor’s strategy for diversification conceivably could be to invest in both small and large caps which would cover the spectrum of both profitability and size.
Past And Future Performance Are Uncorrelated
The caveat is that, as usual, past performance is not an indicator of future returns. While the 90s saw a run-up of large cap valuations, the same was not true of the late 2000s when the large caps tumbled in value up to 60% at some point. As of late 2010 the large cap indices are flat for the decade. Therefore the strategy to invest only in large caps is not a fool-proof one, at least not in the first decade of the 21st century.
The Largest Few
Some of the biggest large cap mutual funds by assets are given as follows: PIMCO Total Return Instl, $137 billion; SPDR S&P 500, $72 billion; Vanguard Total Stock Mkt Idx Investor, $63 billion; American Funds Grth Fund of Amer A, $61 billion; American Funds Capital Inc Bldr A, $55 billion. However investors buying mutual funds should keep in mind that having the most asssets is no guarantee of return. In fact, most of the large caps did not do well for the decade at the end of 2010 due to recessionary fears and general down turns in the economy.