Large-Cap Vs. Small-Cap: What to Play in '07

With the U.S. economy showing signs of a slowdown, some analysts are recommending a move from small-cap to large-cap investments. But Bill McVail of the Turner Small-Cap Growth Fund thinks both can work. He and Fifth Third Asset Management’s Mary Jane Matts debated the issue on “Morning Call.”

Matts says the slowing growth in the U.S. relative to growth overseas means small-caps will inevitably take a hit because of their “domestic orientation.” The strong growth the U.S. economy saw last year fueled a surge in the small-cap sector, but conditions seem to be reversing in 2007.

McVail sees good valuation in both large- and small-cap stocks, so there are solid plays for investors on both sides. But a slowing economy doesn’t necessarily preclude small-caps from outperforming, he says. As earnings growth slows, investors tend to look for growth – and they can find it in small-caps.

“Even in tough markets, there are always going to be great small-cap companies,” he says. He advises investors to have a long-term focus and hold both large- and small-cap equities.