What defines a large cap stock? This seemingly straightforward question has taken on new complexity in today’s evolving market. As Bill Nygren pointed out in a recent presentation, “many large businesses are being classified as mid-cap stocks,” fundamentally altering the way investors approach stock selection.
At Oakmark, the team has confronted these challenges head-on, recognizing both the shifting definitions of market capitalization and the implications for portfolio management.
The Evolution of Market Capitalization
For years, Morningstar has served as a key arbiter in defining company sizes, categorizing stocks into various caps based on their relative market value. According to their methodology, “they start with the largest cap stocks and then move down the list until they get to forty percent of a country’s total market capitalization.”
The impact of this approach has become increasingly pronounced due to the rise of mega-cap stocks, pushing what was once considered large cap into the mid-cap territory.
Nygren illustrated this shift with stark figures: “Five years ago, the cutoff for a large cap was $22 billion. Today it’s $68 billion.” This sharp increase reflects the dominance of companies like Apple and NVIDIA, whose staggering growth has reshaped market categorizations. Consequently, fewer companies now qualify as large cap, reducing the investable universe for many fund managers.
The Shrinking Large Cap Universe
Historically, Oakmark has navigated a large cap universe that averaged around 265 companies. “We were above that level as recently as 2021,” Nygren explained, “but you can see that number has now fallen to 167.”
This figure mirrors levels seen during the peak of the dot-com bubble in 2000. While the total number of publicly traded companies has shrunk over time—from about 8,000 to just over 4,000—the current reduction in large caps is largely due to the growing dominance of mega-cap firms rather than an overall market contraction.
This trend poses a challenge for fund managers trying to adhere to strict investment categories. As Nygren noted, “The problem isn’t quite as dire in the large blend or large value categories, but in both those categories, the average portfolio has more holdings than there are names in the style box.”
This structural shift makes active management more difficult, forcing managers to either run more concentrated portfolios, lower their active share, or step outside traditional style boxes.
A Shift in Portfolio Strategy
At Oakmark, the approach to large cap investing has evolved in response to these market changes. Mike Nicolas emphasized the importance of distinguishing between market capitalization and the fundamental characteristics of a large business.
“We really are thinking about fundamental characteristics that help us quantify or measure the actual size of the underlying company,” he explained. Rather than relying solely on market cap, Oakmark assesses companies based on factors such as revenue, operating income, and shareholders’ equity.
This approach helps avoid scenarios where “a young, small underlying business will have an enormous market cap due to the expectation that it will grow at a supernormal rate far into the future.” By focusing on companies that meet fundamental size criteria rather than just market value, Oakmark ensures its portfolio remains anchored in true large businesses rather than inflated stock prices.
Looking Forward
Ultimately, as the investing landscape continues to evolve, fund managers must adapt. “Today, our holdings are getting crowded out because of the very high success that mega-cap companies have had,” Nygren observed. While this is not a reflection of overvaluation, it highlights the growing concentration within indices and the need for a broader perspective in stock selection.
Oakmark’s strategy demonstrates the importance of redefining opportunity sets in an era where traditional classifications may no longer be sufficient. By prioritizing fundamental business metrics over rigid market cap definitions, the fund remains true to its philosophy—”buying big businesses at what we believe to be bargain prices.”
In a market that increasingly challenges conventional categorization, this disciplined approach may offer a path forward for investors seeking to navigate an evolving large cap landscape.
You can find the entire presentation here:
Bill Nygren – A look at the shrinking U.S. large cap universe
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