What it means
Market capitalisation is the total value of a company's shares, found by multiplying the share price by the number of shares in issue. A portfolio holds many companies of very different sizes, and the weighted average gives a single figure for the typical holding.
Weighting is vital. A portfolio might hold fifty companies, but if three giants account for half the money, the average should reflect that fact, which a simple average of company sizes would miss.
Fund fact sheets often report the figure as a way of describing style. A large weighted average market capitalisation suggests a large-company fund, while a small one suggests exposure to mid-sized or smaller businesses, which tend to behave differently.
The measure helps with risk and comparison. Smaller companies can offer more growth but also more volatility and lower trading volume, so knowing the weighted size helps an investor judge whether the risk matches the objective.
The abbreviation is not universal, so reports should spell out the full phrase on first use. The figure also moves constantly, because share prices change daily, and it can be distorted when a few very large holdings dominate.
The measure is related to, but different from, the market capitalisation of the index the fund tracks. A fund that is equally weighted across its holdings will have a lower weighted average market capitalisation than a fund that weights by company size, even if both hold the same companies.
In practice
Real-world examples.
Example
A pension fund trustee reviews a small-company equity fund and finds that its weighted average market capitalisation has crept up over three years. She asks the manager whether the fund is drifting towards larger companies than its mandate intends. The manager agrees to report the figure in each quarterly review.
Example
An adviser compares two funds with similar returns. One has a weighted average market capitalisation of $150 billion and the other $6 billion, so she explains to the client that the second carries more small-company risk. The client chooses to hold some of each to balance growth potential and stability.
Example
An index provider shows that its large-cap index has a weighted average market capitalisation many times that of its small-cap index. The company uses the figure in its marketing to help investors choose the right product. A simple table puts the numbers side by side for a quick comparison.
Formula
Calculation
WAMC = sum of (portfolio weight of holding x market capitalisation of holding)
Suppose a fund puts 50% of its money in Company A with a market capitalisation of $200 billion, 30% in Company B with $80 billion and 20% in Company C with $10 billion. The calculation is (0.5 x 200) + (0.3 x 80) + (0.2 x 10) = 100 + 24 + 2 = $126 billion. A simple average of the three company sizes would give (200 + 80 + 10) / 3 = about $96.7 billion, which understates the influence of the largest holding. If Company A rose in value to $300 billion and the weights stayed the same, WAMC would rise to 150 + 24 + 2 = $176 billion.Case study
Seen in the real world.
Birchwood Asset Management is an illustrative, fictional firm that runs a fund described as focused on mid-sized companies. Its mandate said the weighted average market capitalisation should stay between $5 billion and $20 billion.
After a long period of strong returns, several holdings grew so large that the weighted figure reached $31 billion. The compliance officer reported that the fund was no longer matching its description.
The portfolio manager sold part of the largest holdings and bought smaller companies to bring the figure back inside the range. The illustrative lesson is that a successful holding can change the character of a fund, so size should be monitored regularly. Birchwood now has a monthly check that flags the fund if the weighted figure moves within 10% of either limit.
Watch out
Common mistakes.
- Using a simple average of company sizes instead of weighting by portfolio share.
- Reading a large weighted average market capitalisation as proof of low risk, when large companies can also fall sharply.
- Comparing figures across funds without checking that they are measured on the same date and in the same currency.
Questions
People also ask.
What counts as a large company?
There is no single official cut-off, and different index providers and fund groups use their own ranges.
Is the measure the same as the median market capitalisation?
No, the median is the midpoint holding, and it can be much smaller than the weighted average when a few giants dominate.
How often should the figure be checked?
Managers often monitor it monthly, and the fund publishes it in its regular reports. Investors should compare the date of the figure with the date of any other statistics used.
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