Expert: Warren Boroson - 4/18/2006

Question
Hi,

Sorry about the list of questions earlier.  Just two quick questions:
1) What's the difference between small cap, mid cap, and large cap funds?
2) What's the difference between value, blend, and growth funds?

Thanks again!!!

Answer
I'll give you a quick answer.

Small company stocks, over the years, have outperformed other stocks, but erratically, unpredictably. That's why most authorities recommend that a portfolio tilt toward large-company stocks. BUT...the people who run Dimensional Fund Advisors, recognizing the long-term advantage of small caps, tilt their portfolios toward small caps.

Large-cap stocks sre less volatile, less risky, than small caps, in part because they are more likely to pay dividends--which can keep stocks from falling off the table.

Mid-caps are an underappreciated category. They have the benefits of both small caps and mid caps.

Morningstar uses this definition: Large-caps make up 70% of the market by market cap, mid-caps 20%, small caps 10%. Market cap: a measure of size, stock price times stock outstanding.

The 70-20-10 guideline is sometimes recommended for a portfolio, but clearly the 10% is too small.

***

Value stocks seem to be cheap. They have low price-earnings and price-book ratios. Over the years, they have done better than growth stocks--which are the more popular stocks, with high price-earnings and price-book ratios. (Think: Google.) Which is why a portfolio should probably tilt toward value. (DFA also tilts toward value.)

A blend stock/fund might be a combination of value and growth stocks, or one that has p-e and price-book ratios in the middle.

Small-caps, mid-caps, and large-caps tend to perform differently at any one time--which is why a portfolio, to be stable, should have exposure to all types. Same goes for growth and value. Recently small-caps and value stocks have been doing especially well, which is why observors think that it's time for large growth stocks to start outperforming.

I hope this helps.

WB