Breakdown: Fund Positions by Market Capitalization

One thing I am interested in viewing is what sort of fund my mock mutual fund would be categorized as, in the Morningstar world of market capitalizations. For those unfamiliar with market capitalization it's essentially a fancy word with many syllables to scare you off; it basically means 'size'. Essentially a company has X number of shares and $X stock price. By multiplying the two you get 'size'/market capitalization (or "cap" for short).

Why does it matter? Well all conventional wisdom says you should diversify your assets among different sizes of stocks as certain sizes fall in and out of favor with the investment community over time. For example in the late 90s, large cap stocks were all the rage, but the past half decade it's been small cap stocks time to dominate. While I agree with the conventional wisdom that your investments should be spread out among many different sizes, especially if one is a passive investor (i.e. buy a mutual fund and look at it twice a year), this stringent labeling of mutual funds has pushed the mutual fund industry to really limit the ability of their mutual fund managers by forcing many to only allow investments in certain size of companies. So a manager in a large cap mutual fund might see some great companies smaller than the 'bottom limit' he is allowed to invest in, but is not allowed to buy those stocks. Sort of silly.

The mock fund I have here, and a small % of funds out there in the real world are "go anywhere" funds, meaning they can buy any size. This lets the manager to buy what he/she prefers, rather than be limited by size. I generally prefer (all things being equal) smaller over larger as it is easier to sustain higher growth rates when companies are smaller. This makes the remarkable growth rates of companies the size of Apple (AAPL) and Google (GOOG) the exception, and not the rule.

The other bugaboo is definitions of where exactly the cut off is for what is a large cap versus a mid cap versus a small cap. You ask 20 investment companies and you get 20 answers. For purposes of this analysis I split things into 5 categories:

1. Mega cap: >$100 Billion market cap
2. Large cap: $12-$100 Billion
3. Medium cap: $3-$12 Billion
4. Small cap: $500 million - $3 Billion
5. Micro cap: under $500 million

Again, this is a matter of debate on where the exact cut-offs are but good enough. If I exclude the index ETFs, the country ETFs (i.e. iShares Malaysia), etc - this leaves 53 out of 60 positions with 'measurable' market cap. The MEDIAN market cap of the fund at this time is $9.9 Billion (larger than I assumed).

I measure the fund versus 2 indexes, (1) S&P 500 - whose median market cap is $13.1 Billion and (2) Russell 2000 - whose median market cap is $647 million. So after analyzing this I think the Russell 2000 is not an accurate measure of the fund's performance, so going forward I am going to measure against the larger Russell 1000 - whose median market cap is $5.8 Billion. The median market cap of the Russell 1000 is still smaller (by nearly half) of Rising Tide Growth Fund but represents 1000 of the largest 3000 securities in the Russell 3000, so should be a closer measure to what type of stocks this fund owns.

But what this shows you is how few "truly large" companies there are in the US - once you get past the first 1000, the size drops off rapidly. So the fund is somewhere in between the Russell 1000 and S&P 500.

Let's break my holdings out by segment (largest to smallest)

Mega Cap
GOOG $185 B
AAPL $140 B

Large Cap
FCX $42.2 B
ACH $35.8 B
CME $34.5 B
POT $33.2 B
NOV $27.4 B
IBN $24.2 B
MOS $23.1 B
GRMN $22.5 B
MA $22.0 B
BLK $20.8 B
BRCM $20.1 B
JNPR $19.0 B
GSF $17.3 B
DO $15.6 B
CMI $14.4 B
CNH $13.8 B
MDR $13.1 B
BTU $13.0 B
NIHD $12.5 B

Mid Cap
SNDK $11.9 B
HDB $11.9 B
ATI $11.3 B
ICE $10.9 B
FWLT $10.0 B
JEC $9.9 B
CNX $8.4 B
FTI $7.4 B
KBR $6.9 B
STP $6.3 B
PDE $6.0 B
CROX $5.5 B
TIE $5.3 B
LDK $5.3 B
SGR $4.8 B
FTO $4.6 B
CIEN $4.0 B
CF $4.0 B
BGC $3.8 B
CTRP $3.4 B
RVBD $3.1 B
HXM $3.1 B
CLB $3.0 B

Small Cap
WNR $2.8 B
UA $2.8 B
EDU $2.5 B
PCR $1.7 B
TSL $1.3 B
GMKT $1.3 B
BCSI $1.3 B

Micro Cap
DHIL $0.2 B
BTJ $0.2 B

***************
Again, this is not dollar cost weighted (i.e. larger positions have more weight) but I was a bit surprised to see how high the median market cap in the fund was; I always assumed it would be lower. But that does also align with my belief that larger international focused companies are the place to be as we enter an era of global modernization, along with the fact this type of fund is more focused not on hitting home runs (finding never heard of micro caps, buying 10 and hoping 1 turns into the next Microsoft, but striking out a lot), but instead is focused on hitting a lot of singles and doubles with a few triples, and trying to limit strike outs.

So going forward, I will be changing my measurement on the second index from Russell 2000 to Russell 1000; this makes me feel a bit better than I could not keep up with the Russell 2000 this week but the reality is the composition of my fund (median market cap $9.9 Billion) is nothing like the Russell 2000 (median market cap $647 million). It also would put this fund firmly in the 'large/medium cap growth' positioning in the Morningstar mutual fund style box.

I'll take another look in a quarter to see if there is any meaningful change to the median market cap of the fund.