July 01, 2002

U.S. large-cap growth stocks ruled the investment world during the last decade of the millennium. However during the last couple years the tide appears to have turned. Small-cap and value stocks have outperformed their large growth counterparts. In the international arena it seems that foreign stocks are catching up with the U.S. stocks. This dramatic shift in relative performance has produced some intriguing responses. The mean reversion hypothesis is gaining currency among investors and portfolio managers. Whether the recent experience represents a long-lasting shift in relative equity valuations or a string of unexpected temporary shocks is still to be seen. Regardless, this issue has important implications for portfolio allocation decisions. The mean reversion logic suggests that it is now the small-cap international stocks turn. The market data for the last few months supports this view of the world. The issue at hand is whether the shift is real and how to take advantage of it. (full article attached)

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