Average Market Capitalization

Average market capitalization is included in Morningstar's style box calculation. But you should examine it anyway because there are small-cap funds and there are really small-cap funds.

Some examples

Take hypothetical examples XYZ Small Cap and ABC Value, for illustration. Both land in the small-cap value portion of the style box. But despite its small-sounding name, XYZ Small Cap sports an average market cap of over $2 billion, while ABC Value's managers consistently buy tiny firms for a portfolio with an average market cap of $317 million. That's an enormous difference. That means that ABC Value will do well against other small-value funds when micro-caps are doing well in the market. Of course, it also lags when investors get nervous and flock to larger, more established firms. Investors who aren't aware of the fund's bias might evaluate the fund as good or bad without understanding the reason behind its performance.

There are variations within the large-cap world

Conversely, there's a difference between large-cap and really large-cap funds. ABC Growth Index, for instance, carries an average market capitalization of $36.5 billion, while XYZ Growth clocks in at just $14.5 billion. While both are large-cap growth funds, the former fund will outperform the latter when giant-sized companies are leading the market. Conversely, the latter fund should one-up the former if smaller companies (well, small within the large-cap division) have the lead.