Signs Pointing to Large-Caps

In This Uncertain Market, Big Firms May Be the Safest

NEW YORK

Big may be beautiful again.

For about two years, many market analysts have been predicting the return of large, growth-oriented companies. But smaller-company shares have persistently outrun the big boys.

Now, with a fog of uncertainty clouding stocks, money managers are renewing their predictions that big companies will outpace smaller ones in the latter half of 2007.

For much of the spring, stocks appeared invincible, shooting higher without so much as a pause. On May 30, the Standard & Poor's 500-stock index surged above the peak it hit during the tech bubble seven years ago.

Then came a wave of turbulence. The culprits were inflationary fears and a sputtering housing market. Investors had put these concerns on the back burner while stocks rallied on a stream of corporate deals and better-than-expected earnings. But the fears came into focus as central banks around the world raised interest rates and two U.S. hedge funds invested in shaky mortgages teetered on the edge of collapse.

All major U.S. stock indexes fell in June, though they still finished higher for the quarter. The S&P 500 rose 5.8 percent in the quarter, while the Dow Jones industrial average gained 8.5 percent. The tech-heavy Nasdaq composite index was up 7.5 percent.

Mutual funds that invest in large, growth-oriented companies still took a back seat to small ones, though the gap narrowed in the second quarter. Large-cap growth funds returned 6.6 percent, compared with 7.5 percent for small-cap growth funds, according to Lipper, a data firm. In the first six months of the year, large-cap growth funds returned 7.6 percent, compared with 11 percent for small-cap growth funds.

"I think the market is starting to shift," said Mark A. Coffelt, portfolio manager of a multi-cap fund at Empiric Funds. "We're entering an environment that's going to favor large caps."

He said his fund, which looks for companies that represent value, was heavily invested in small-cap stocks two years ago but now holds mostly large companies, which have become cheap after years of lackluster performance.

Money managers say the narrowing returns between the small- and large-cap funds reflect an economy in wind-down mode. Generally, smaller companies benefit during the early stages of an economic cycle, and larger, diversified companies are better positioned to weather downturns. "When the storm comes, you want to be in the biggest boat you can get," Coffelt said.