Default asset allocation

CB2023

I have some shares in the Vanguard 500 index fund. When I look at the default asset allocation, a window pops up saying that 17.2% is contained within the Small Cap Stock asset class. How is this calculated?

I would have thought this fund was 100% large cap.

jacobs

It's not a calculation Quicken does; Quicken buys data service which provides the asset allocations for every security. Because Quicken uses Morningstar for data on the investing.quicken.com pages for detailed data about securities, it's possible Morningstar is the source — but Quicken may purchase this data from whoever they get their security price data from. Whoever it is analyzes the makeup of the 507 stocks which Vanguard holds in this fund and allocates them proportionally to the asset classes shown in Quicken:

You'll note that Quicken's asset classes do not include mid-cap stocks. And we have no idea what the dividing line is between large and small cap.

If you decide you want to treat the Index 500 fund as purely a large-cap security, you can override Quicken's asset mixture and set the security to Large Cap, or to your own asset mix (e.g. 95% large cap, 3% small cap, 1% international, 1% cash).

jacobs

It's not a calculation Quicken does; Quicken buys data service which provides the asset allocations for every security. Because Quicken uses Morningstar for data on the investing.quicken.com pages for detailed data about securities, it's possible Morningstar is the source — but Quicken may purchase this data from whoever they get their security price data from. Whoever it is analyzes the makeup of the 507 stocks which Vanguard holds in this fund and allocates them proportionally to the asset classes shown in Quicken:

You'll note that Quicken's asset classes do not include mid-cap stocks. And we have no idea what the dividing line is between large and small cap.

If you decide you want to treat the Index 500 fund as purely a large-cap security, you can override Quicken's asset mixture and set the security to Large Cap, or to your own asset mix (e.g. 95% large cap, 3% small cap, 1% international, 1% cash).

CB2023

Thanks

I still find it odd that Quicken assigns a chunk of a fund that follows the S&P 500 as anything other than large cap.

I would like to use Quicken to help with rebalancing investments. It looks as though I will have to override Quicken’s assignment of classes.

jacobs

I agree that showing 17% of the S&P 500 as "small cap" stocks seems off. But…

As previously noted, Quicken Mac doesn't have a mid-cap category of asset, something I've never understood. The most common definition Ive found is that large cap is companies with a market capitalization of more than $10 billion, mid-cap is $2 billion to $10 billion, and small cap is under $2 billion. Well, what if Quicken's reporting combines small- and mid-cap and shows them as small-cap? While there are no companies with a market cap of under $2 billion in the S&P 500, you might be surprised to find that there are 40-50 companies with a market cap under $10 billion. (Market cap values change daily, of course, and there are a lot of S&P 500 companies slightly above or below $10 billion at any point.) Well, that doesn't get us to 17%; it's more like 9% by number of companies, and a lot less than that by market value. So that doesn't explain it, but might point in the direction of why Quicken Mac reports less than 100% large-cap allocation for the Vanguard 500 Index fund.

You've got me curious now, so I'll try to do some more digging to see if I can come up with more answers. 😉

jacobs

After doing more research, and asking Quicken Windows users to confirm that they are seeing the same asset allocation as we Mac users are (they are), I think I have somewhat of an answer.

I found a reference to Morningstar using a different system for the breakpoints between small-, mid- and large cap stocks. "Morningstar uses a flexible system that isn't adversely affected by overall movements in the market. Large-cap stocks are defined as the group that accounts for the top 70% of the capitalization of the Morningstar domestic stock universe; mid-cap stocks represent the next 20%; and small-cap stocks represent the balance."

That makes some sense, instead of having securities switch between small- and mid-cap, or mid- and large-cap, base don the market moving up or down and securities crossing over fixed dollar amount breakpoints, Morningstar segregates small, mid and large as a percentage of companies, so that broad moves in the market won't shift stocks into a different asset allocation range.

And that definition seems to explain why 17% of the S&P 500 is counted as mid-cap stocks, even though it's a definition which goes against what much of the investing world uses to define the breakpoints. If you look at the S&P 500 on Morningstar's site, you'll find this grid of their breakdown:

When you add the mid-cap values of 6 + 8 + 3, you get 17% of the total! And Quicken, which does not have a separate asset class for mid-cap stocks (for reasons I haven't discovered, other than verifying its uniform between Mac and Windows), combines small and mi-cap values together. Thus 83% large cap, 17% small cap, using Morningstar's allocation.

CB2023

Thank you. This clears it up — but I am going to override it!