The Exclusive Club Of Large Caps
Picture one of those clubs where only the real heavyweights need apply. In the library the old aristocrats, General Motors and JP Morgan, are dozing in their leather chairs. On the terrace, a late luncheon is underway for those who have only improved their standing through marriage. ExxonMobil and Citigroup are part of the party. At the bar, a number of the"nouveau riche" have gathered - Microsoft seems to be buying for Intel and Hewlett Packard. Welcome to the world of the Large Cap Stock Club, the biggest of the worlds publicly traded companies.
For those interested in applying, membership includes a minimum market capitalization of at least $1 billion and can go upwards to $10 billion depending on whom you talk to. Included in the resumes are often affiliations with other well known groups. 30 are currently with the Dow Jones Industrial Index and many more with the Standard and Poor's 500. Both these groups are widely followed indicators of the health of the stock market.
The Dow Jones Industrial Average (DJIA) traces its lineage back to 1928 when companies like Victor Talking Machine (later merged into RCA Corp.), Nash Motors (later merged into American Motors) and F.W. Woolworth Company kept company with General Electric and General Motors, the only two remaining original members. Today, household names like McDonalds, Home Depot, Disney and Wal-Mart have replaced some of their earlier brethren. Calculating the average is done by adding the prices of the 30 stocks and dividing by an adjusted denominator.
Because the Standard and Poor's 500 Index (S&P 500) has 500 companies in the index, many believe this to be a more accurate indicator than the DJIA. Also unlike the Dow Jones Industrial Index, the S&P 500 is a weighted index - meaning each stock's weight is determined by its market value.
Unofficially, some Large Cap companies are known as "blue chips". This term originally came from poker chips where the blue chips were the most expensive. Today, this generally denotes high quality, usually being reserved for large companies with stable earnings and a history of dividend growth.
Investors in mutual funds are apparently big fans of Large Cap stocks. Of the 10 largest mutual funds, seven are invested primarily in US Stock and all of these (Growth Fund of America, Investment Company of America, American Funds, Washington Mutual, Dodge & Cox Stock, Fidelity Contrafund, Fidelity Magellan, and Vanguard Index 500) are Large Cap funds.
One might think that, with all these pedigrees, the world of large caps might be scandal free, but with the recent lessons learned from Enron and WorldCom, we know that even the mightiest can fall from their lofty perches. Once again, we are reminded that when it comes to investing, there simply are no guarantees.
Looking at returns (using the annual returns of the S&P 500 from 1926 - 2004, including reinvestment of dividends ) we find that the best year for Large Caps was 1933 with a return of +53.99%. On the other hand, two years prior to that, in 1931, the return was a dismal -43.34%. Of the 78 years between 1926 - 2004, the S&P 500 posted positive returns for 56 of those years. To put it another way, therehave been more than twice as many up years as there were down years. Naturally, this is all past track record. The future holds no guarantees that this will continue.
Turning again to Large Cap mutual funds, it is important to note that most are "managed" funds, rather than "unmanaged" funds like the S&P 500 Index. This simply means that most mutual funds have managers who pick certain stocks out of the large cap universe rather than follow an index of the entire universe. This not only creates return differences between the funds and the indexes, but also creates differences between the funds as well.
It may also be a good idea to check the dividend history of funds. While some funds specifically buy stocks with higher dividends, other funds could care less what dividends are paid. Normally, stock based mutual funds will pay dividends once a year (usually in December), but sometimes pay more frequently. Whatever the case, the amount of dividends can be important depending on the need for income.
Obviously, large companies shouldn't be the only asset class considered for a well rounded portfolio. Mid-size companies and small-size companies are important to achieve proper asset allocation. However, for investing in well known companies that are truly the "movers and shakers," nothing beats the Large Cap Stocks.
Copyright 2005. LivingTrustNetwork, LLC. All rights reserved.
About the Author: Glenn (?Chip?) Dahlke, a senior contributor to the Living Trust Network (http://www.livingtrustnetwork.com), has 28 years in the investment business. He is a Registered Representative of Linsco/Private Ledger and a principal with Dahlke Financial Group. If you have any questions or comments, Chip would love to hear from you. You may contact him by email email@example.com