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Long/Short Investments in L/S Equity: Valuation and Ideas,

Large/Mid Cap Fund Makes Another All-Time High – Overvalued Or More To Come?

US large and mid caps keep making all-time highs as earnings growth improves even while liquidity is taken away gradually in the US economy.

It is generally taken that small cap stocks outperform their large cap counterparts over time, though not necessarily on a risk-adjusted basis.

This appears to be true comparing three different funds – standard SPY, VV (large/mid cap fund under discussion here), VO (mid cap), and VB (small cap).

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Large/mid caps have outperformed the S&P 500 since January 2004, but not to an appreciable extent (only 34 basis points annualized), as the correlation is so high. Small and mid caps have outperformed the S&P by 140-180 bps over this time. But controlling for risk, the gains are equal with respect to mid caps and small caps have performed worse when including risk-adjustment.

Although VV is labeled as a large cap fund – technically an arbitrary distinction – over 50% of its holdings are of the mid cap variety (e.g., between $2 billion and $20 billion in market capitalization). Though if the definition is reduced down to $10 billion market caps or less, the ratio is closer to 90%/10% in favor of large caps.

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Technology is the most heavily weighted sector at 22%, followed by financials (15%), and healthcare (14%).

Its expense ratio is just 0.06% ($6 for every $10,000 invested).

With 596 holdings, the top 10 consume ~18% of the weighting and are made up of all the main suspects – Apple (AAPL), Microsoft (MSFT), Amazon (AMZN), Johnson & Johnson (JNJ), Facebook (FB), Exxon Mobil (XOM), Berkshire Hathaway (BRK.B), JPMorgan (JPM), and Google (GOOG)(GOOGL).

The top 15 (adding on WFC, BAC, GE, T, and PG) take up ~24% of the fund and are the only stocks to have more than a 1% individual representation in the fund, while the top 50 consume 46% collectively.

Overall, the fund covers about 85% of the total market capitalization of the US stock market, only excluding small caps and bottom-end mid caps.

Note that something trading at or around all-time highs is never a justification as to whether something is a good investment. In fact, it often means the opposite. When prices rise, things become more expensive.

Nonetheless, recession risk remains low throughout the remainder of 2017 and at least some ways into 2018 (barring something unexpected geopolitically). Stocks are more likely than not to continue increasing from here, though if they do trek down I would expect it to be a gradual squeeze rather than an abrupt crunch.

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