Through various governmental agencies, Maine actively encourages the growth of publicly traded firms in the state. The benefit that Maine expects to achieve includes additional employment activities, local purchases, tax revenues, or infrastructure buildup. This study, however, is motivated to examine whether an additional case can be made for investors to patronize these Maine firms.

Since investors can always hold a broad market-based portfolio through indexed mutual funds, why should they consider a narrowly focused Maine portfolio? Thus, assessing the relative opportunity cost for patronizing the Maine portfolio over the S&P 500 becomes an interesting issue. Accordingly, this study compares the price performance of holding simulated Maine portfolios to that of the overall market, represented by several indices. We attempt to determine whether such Maine fever pays off for its investors, or instead extracts a penalty from them.

An additional result gained from this study is measuring the correlation between the price performance of the Maine portfolio to the market -- that is, how closely it mirrors the national indices. A high correlation might imply that a bust in the domestic stock market would have an adverse impact on Maine stocks. Such a depression in the price performance of these Maine stocks, in turn, are likely to affect their growth of business exposure in Maine.

This study focuses on the share price performance of only such firms that are important to Maine. The Maine exposure may or may not be significant to the bottom line of a firm itself, but as long as the firm has an appreciable impact upon the economic and social welfare of Maine, it has been included in the study. These companies collectively comprise the Maine portfolio. In a portion of its daily business section, entitled "Stocks of Local Interest," the Portland Press Herald publishes the daily price performance of this group. The "Stock Watch" page of Business Profile, compiled by Salomon Smith Barney of Portland, also provides similar lists. Our list corresponds to these sources. The notable absence from this list is the well-known Maine company, L.L. Bean, for that company is not publicly traded.

The study compares the price performance of holding simulated Maine portfolios to that of the overall market, represented by several indices. By doing so, one could assess how closely the price performance of these select firms mirror the national indices. Stock price performances of these firms are likely to influence their business activities and exposure in Maine. The interest of Maine so affected might include employment activities, local purchases, tax revenues, or infrastructure buildup. <An interesting issue to examine is whether patronizing the Maine portfolio results in penalty or additional reward for the investors, as compared to that of the overall market. - unclear>

Table 1 provides several vital statistics for firms comprising the Maine portfolio, differentiated by their respective industry affiliations, and compiled from the Morningstar database. Summary statistics of this portfolio are also noted. In terms of market capitalization, the portfolio includes multinational giants such as Proctor & Gamble ($111 billion) to very small firms such as Immucell ($5 million). Obviously, the large-firm effect dominates most of the portfolio statistics.

Table 2 provides a monthly price history over the last three years (from Jan. 1995 to Dec. 1997) for two simulated portfolios, along with the four indices used for measuring their relative performance. We have labeled one simulated portfolio the Maine Bank Portfolio, comprised of all the firms in the banking and financial sector. We have labeled the other simulated portfolio the Maine Stock Portfolio, which is made up of firms not involved in banking or finance.

Furthermore, we have weighted each one of these simulated portfolios in two different ways. On the one hand, each portfolio is equally weighted, meaning that the portfolio is composed of all the stocks with an equal dollar amount invested in each. The second method of weighting is by value, where the weight of each firm is estimated by dividing the market capitalization of that firm by the market capitalization of the entire portfolio. In the value-weighted case, therefore, a proportionately larger amount is invested in the larger stocks based on market capitalization (as of March 2, 1998).

As for the four indices used as a comparison, the S&P 500 Index (SPX), which is the most popular indicator of market performance, is composed of the largest 500 publicly traded companies in the United States. The Russell 3000 (RAY) Index has 3,000 stocks, including mid- and small-cap firms. In that regard, RAY could be a better index to compare to the Maine Stock Portfolio. The S&P Bank Composite Index (SPBNKC), and the NASDAQ Financial Index (NDF), are specialized indices representing the financial sector of the market. The NDF includes smaller publicly traded companies in the financial services industry than does the SPBNKC. All data were compiled from Bloomberg.

During this three-year period, the value-weighted Maine portfolio performed as well as or better (27.8%) than the overall market indices (S&P 500: 27.3%, and Russell 3000: 26.4%) on an annualized basis. The equally weighted Maine portfolio (19.5%), however, lagged behind those indices substantially, confirming the under-performance of small stocks during this investment horizon. In the financial sector, however, the Maine equally weighted portfolio (42.0%) outperformed the banking indices (S&P Bank: 40.9%, and NASDAQ Financial: 40.9%). Apparently, the small financial firms in Maine have done even better than the already superior performing financial sector of the state.

Figure 2 is a plot of the two Maine stock portfolios (equally weighted, and value-weighted), and two broad market indices (S&P 500 and Russell 3000). The two vertical indexes are of different scales (left scale for the portfolios, right scale for the indices). They provide a snapshot of the inter-temporal behavior of the Maine portfolios, and the market indices, over the recent three-year period studied. The correlations of the Maine portfolios (equally weighted: 0.9859; value-weighted: 0.9933) with the S&P 500 index are very high. Therefore, investors would not gain further diversification benefit from adding any broad market portfolios (S&P 500) to their Maine portfolio holdings.

Figure 3 plots the price performance of the two financial sector Maine portfolios (value- and equally weighted) and two relevant overall financial market indices (S&P Bank Index and NASDAQ Financial Index). Both of the financial sector Maine portfolios exhibit a very high correlation (equally weighted: 0.9933; value-weighted: 0.9951) with the S&P Bank Index.

This study has several limitations. It focused on a short-term holding period, observed price performance -- not rate-of-return data -- used current market capitalization as weights for the entire period, and allowed large-firm bias in the portfolio. Nevertheless, it still appears that publicly held firms of interest in Maine have rewarded their investors well compared to the investors of the broader market. The financial stocks of Maine portfolios, in particular, had a remarkably successful period compared to both the overall market as well as the sector indices. In addition, the Maine portfolio investors did not lose any diversification benefit that they could have had by holding a broader market index. Consequently, a case can be made for investor prference for holding the Maine portfolios. With that assurance to investors, any additional socio-economic benefits for having these firms in Maine only adds icing to the cake.