Finally, given the environment, perhaps the most compelling reason to consider an overweight is that mega caps, along with large caps, have historically been more resilient to slowing domestic growth than small and mid cap companies.
Smaller companies derive the overwhelming majority of their sales from the United States. Not surprisingly, investors tend to reward and punish small and mid cap companies more when growth is expected to rise or fall. Historically, expectations for growth are insignificant for valuing mega cap companies. This is not unreasonable given that many of these firms derive the majority of their sales from outside the United States. The impact of the domestic economy is slightly more significant for large caps, but is still fairly small. However, expected growth explains nearly 20% of the variation in small cap valuations and over 25% of that for mid cap companies.
If the economy continues down the slow growth lane – or worse, the fiscal cliff pushes us back into a recession – mega caps may prove more resilient. Potential solutions for investors would be the iShares S&P 100 Index Fund (NYSEArca: OEF) or the iShares S&P Global 100 Index Fund (NYSEArca: IOO).
Russ Koesterich, CFA, is the iShares Global Chief Investment Strategist.