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Best Deal for Bargain Hunters: Large, Mid & Small-Cap Value Funds

Gourab Das

Investors looking for bargain, i.e., stocks at a discount, are mostly interested in investing in value stocks. To understand value funds, it is important to learn about value stocks – as value mutual funds are those that invest in stocks that are trading at discounts to book value, have low price-to-earnings ratio and have high dividend yields.

Simply, a value stock is one that is trading at a price that is believed to be lower compared to its earnings or other fundamental value measures. Value investing is an old strategy, evolving from investment ideas that Benjamin Graham and David Dodd first popularized in the late 1920s. Value investing is always a very popular strategy, and for good reason. After all, who doesn’t want to find stocks that have low PEs, solid outlooks, and decent dividends?

Berkshire Hathaway chairman Warren Buffett, also a disciple of Benjamin Graham, puts value investing as buying stocks lower than their intrinsic value.

It is not always easy for investors to identify value stocks. So investors may choose to buy value funds, which will give them an exposure to value stocks. Also, one of the benefits of investing in mutual funds is that it allows a small investor to invest in a basket of securities at one go.

Advantage for Investors

Value stocks are the ones that pay dividends. Thus, investors not only get to buy securities at a discount, but they get a steady income or yield. The dividend payments become a source of income for investors, or they may reinvest the cash for more investments. Reinvesting the income is ideal for investors who are keen on value investing but are not looking for current income.

Market Capitalization

The value funds can be also divided into three segments depending on their market capitalizations. Thus, investors get to choose from Large cap, Mid cap or Small cap funds. This choice can be made depending on what suits the investor the most. For a better clarity, let’s take a look at what each of these market capitalizations suggest and then compare their returns.

Simply, market capitalization of a company is calculated by multiplying the shares outstanding with the market value of each share. The result will give us the market cap, depending on whether the company can be categorized under large cap, mid cap or small cap.

Generally, companies with more than $10 billion market cap are considered a large-cap firm. Mid-cap companies have market capitalization within $2-$10 billion. A small-cap company is one that has market capitalization below $2 billion.

However market capitalization in case of funds does not reflect the size of the fund’s assets. Instead, it is an indication on what type of securities the fund invests in.

Large-Cap Funds: A large-cap fund will invest in large-cap companies, i.e., those having market cap above $10 billion. These funds provide the least amount of risk. Most often, the large cap funds tend to duplicate the benchmarks – like the S&P 500. These funds are ideal for investors with a long-term investment timeline.

Mid-Cap Funds: These funds invest in companies generally having market capitalization within $2-$10 billion. These funds are riskier than large-cap funds but are less risky than small-cap funds. Mid-cap funds are not very susceptible to volatility in broader markets. These are ideal investment options for investors looking for high return potential that comes with lower risk than small-cap funds.

Small-Cap Funds: Small-cap funds generally invest in companies having market cap lower than $2 billion. The companies, smaller in size, offer growth potential and their market capitalization may increase subsequently. Small-cap funds are believed to have higher growth potential. Small-cap funds are a good choice for investors seeking diversification across different sectors and companies. Investors with a high risk appetite should invest in these funds. (Read: Small-Cap Funds Giving High Returns)

Performance of Various Market Caps

Small-cap and mid-cap funds generally outperform large-cap funds. This is true as we already discussed that small-cap funds offer larger growth potential and large-cap funds are generally long-term investments.

If we look at the returns the small and mid-cap value seem to be the best bets in terms of return.

       Market Cap   
Returns (in % as of Aug 27)
YTD 1 Year 2 Years 5 Years
Small Cap
Russell 2000 ( RUT.TO)
1 13.2 45.2 NA
Russell 2000 Value (:RUJ)
1 12.3 41.4 84.5
Morningstar Small Cap Index (:MSCP)
3.8 15.7 47.8 115.5
Morningstar Small Value Index (:MSVL)
5.5 17.1 48.6 111.7
Mid Cap
Russell Midcap (:RMCC)
9 20.3 50.9 NA
Russell Midcap Value (:RMCCV)
10.5 20.9 51.9 66.2
Morningstar Mid Cap Index (:MMCP)
8.8 20.7 52.5 124.6
Morningstar Mid Value Index (:MMVL)
8.5 20.4 59.6 111.7
Large Cap
Russell 1000 (:RUI)
8.3 20.4 43.6 NA
Dow Jones U.S. Large-Cap Value Index (:DJUSVL)
7.3 16.6 38.3 78.7
Morningstar Large Cap Index (:MLCP)
8.1 20.2 40.2 90.9
Morningstar Large Value Index (:MLVL)
6.4 16.2 35.3 66.2

Return % calculated using Googlefinance

The mid-cap value index has outperformed others. Mid-cap value has not only led the gains in the short run, but has outperformed the other market caps over the five-year period. On the other hand, though large caps are generally believed to be for long-term gains, it underperformed both the small and mid caps in the last five year.

Value Funds to Buy

We will suggest here the top value funds from each market capitalization.

These funds carry a Zacks Mutual Fund Rank #1 (Strong Buy) as we expect the funds to outperform its peers in the future.

Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but the likely future success of the fund.

These funds are also among the top gainers for this year so far.

Large-Cap Value Fund

Payden Equity Income (PYVLX) invests most of its assets in large-cap value stocks that have high dividend yields. The fund also invests in other income producing equity securities that may include exchange-traded common stocks and REITs. The fund mostly invests in domestic securities. A maximum of 30% of its assets may be invested in non-US securities.

The fund has returned 13% year to date. Over the last one and three years, the fund has returned 21.7% and 20.8%, respectively.

Top holdings of the fund include ConocoPhillips (COP), Merck & Co Inc (MRK), AbbVie Inc (ABBV), General Electric Co (GE) and Microsoft Corp (MSFT).

Mid-Cap Value Fund

TIAA-CREF Mid-Cap Value Premier (TRVPX) seeks total return over the long term through growth of capital. The fund invests a lion’s share of its assets in mid-cap equity securities, as defined by Russell Midcap Value Index. The investment adviser, Teachers Advisors, Inc., considers these mid-cap domestic equities to be undervalued.

The fund has returned 9% year to date. Over the last one and three years, the fund has returned 21.2% and 23.5%, respectively.

Top holdings of the fund include Sempra Energy (SRE), Micron Technology Inc (MU), Ameriprise Financial Inc (AMP), DISH Network Corp (DISH) and Anadarko Petroleum Corp (APC).

Small-Cap Value Fund

Invesco Small Cap Value A (VSCAX) seeks capital growth over the long term. The fund invests in small cap companies or in derivatives with similar economic features. The fund invests in securities, which its investment adviser Invesco Advisers, Inc. believes to be undervalued.

The fund has returned 6.9% year to date. Over the last one and three years, the fund has returned 20.6% and 30.1%, respectively.

Top holdings of the fund include Abercrombie & Fitch Co Class A (ANF), E*Trade Financial Corp (ETFC), LPL Financial Holdings Inc (LPLA), Alere Inc (ALR) and Belden Inc (BDC). 

About Zacks Mutual Fund Rank

By applying the Zacks Rank to mutual funds, investors can find funds that not only outpaced the market in the past but are also expected to outperform going forward. Learn more about the Zacks Mutual Fund Rank in our Mutual Fund Center.

Read the analyst report on PYVLX

Read the analyst report on TRVPX

Read the analyst report on VSCAX

Read the analyst report on COP

Read the analyst report on MRK

Read the analyst report on GE

Read the analyst report on MSFT

Read the analyst report on DISH

Read the analyst report on ANF

Read the analyst report on ETFC

Read the analyst report on LPLA

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