- The Washington Times - Tuesday, May 16, 2006

All eyes have been focused on the Dow Jones Industrial Average as it moves in fits and starts toward a new all-time record for the first time in six years.

One reason the Dow has been testing six-year highs is that investors, who have heavily favored the stock in small- and mid-sized companies since the 2000-2002 crash, have newfound appreciation for large-cap equities, experts say.

There were signs last year that a shift was under way, but it didn’t materialize, leaving analysts a bit skittish about calling the turn now.

“I can’t jump up and down yet,” said Jack A. Ablin of Harris Private Bank. “But I’m encouraged by the signs.”

Mr. Ablin’s been watching the Standard & Poor’s 100 Index, a broader measure of large-cap stocks than the 30-equity Dow, and he said that “what we’re finding is, since the end of March, the largest companies are starting to outpace the small.”

The S&P; 100’s large-cap companies underperformed the small- and mid-cap companies in the Russell 2000 by almost 55 percent over the past five years. But since the end of March, the S&P; 100 gained nearly 3 percent before dipping in recent days; the small- and mid-cap Russell 2000, meanwhile, was up less than 2 percent.

“At long last, it appears, the worm has turned for the mega-caps,” Mr. Ablin said.

The Dow, meanwhile, climbed to within about 75 points of its record close of 11,722.98 on Jan. 14, 2000, before getting skittish last Wednesday over the Federal Reserve’s ambiguous statement on the future course of interest rates.

Joseph V. Battipaglia, chief investment officer at Ryan Beck & Co. in Philadelphia, said that the market in general has been encouraged by continuing economic growth in the United States and abroad, as well as solid corporate profit reports.

“The investment community is convinced the economy can still grow despite moves by the Fed to raise interest rates and higher energy costs,” he said. “Consumers don’t like $3 gas and paying more for mortgages, but they’re taking it in stride, and that has renewed [investor] confidence.”

A growth environment tends to benefit large-cap stocks more than smaller ones, he added.

“Bigger companies benefit from global expansion, benefit from a decline in the dollar, which is under way, and benefit by their sheer size and reach,” Mr. Battipaglia said.

Mr. Battipaglia believes that investors should be shifting their equity investments out of small-cap stocks toward large- and mid-sized companies.

“Small caps have had a seven-year run,” he said. “I’d take profits on them now, because valuations can’t be justified.”

In March, investors boosted their holdings of large-cap funds, focusing on those that blend value and growth stocks, according to the Financial Research Corp. in Boston. Inflows into U.S. large blend funds were second only to those into foreign large-cap blend funds. Flows also were positive into large-cap value funds, though there was an outflow again from large-cap growth funds, it said.

Christopher Davis, at fund analyst at Morningstar, said, “Remember that in the late 1990s, investors couldn’t get enough large cap. They couldn’t get enough Cisco, Microsoft. What we said then was, ‘Don’t forget the small cap.’

“When the large caps tanked in 2000, the small-cap investors were rewarded.”

large caps “have experienced a long-running spate of underperformance.” In fact, his firm’s large-cap index was among the worst performers last year, though it showed signs of a rebound in the fourth quarter.

Mr. Davis said that the large-cap blend categories that he follows are doing better this year. Returns on large-cap blend funds are up nearly 6 percent, double their five-year performance. Small-cap blends, meanwhile, are up 12.8 percent, about even with their five-year return.

While investors still are being drawn to small-cap funds, Mr. Davis said, they shouldn’t neglect the large-cap offerings. That’s because they tend to provide steady, dependable growth in a maturing economic recovery, when stock prices generally start to moderate.

He added:

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