Last updated: 18:25 / Wednesday, 2 October 2013
Outstanding Performance

Mid-Cap Funds: the “Sweet Spot” of the US Market

Mid-Cap Funds: the “Sweet Spot” of the US Market

The mid cap segment offers a different type of company than investors find within the large and small cap “bookends” of the market. According to a White Paper by Robeco, the mid cap asset class is characterized by companies that are more successful and mature than those in the small cap arena, which makes mid caps generally less risky than small caps. At the same time, mid cap firms start from a lower baseline in terms of business volume and are generally more nimble than those in the large cap space, which creates more upside potential. U.S. mid caps also present investors with the opportunity to select companies that have “graduated” from small cap status, indicating that their businesses are moving in the right direction.

On a paper signed by Jeremy Zirin, David Lefkowitz and Matthew Baredes, strategists at UBS FS, US mid-caps are highlighted as “the sweet spot” in the equities market due to “accelerating US growth, greater cyclical exposure, upside margin potential and greater exposure to a recovering US housing market”. UBS thinks that the higher beta, greater cyclical exposure and lower dividend yield (which is a positive in a rising interest rate environment), of the mid-cap asset class are the reasons which are driving its outperformance versus large-caps, adding that “this drivers remain in place and would support further gains versus large caps”.

This asset class, which is often under-represented in investor portfolios, has actually had an outstanding performance during the US market recovery.



This graph by Lipper Insight shows that indeed small-and mid-cap funds did outperform large-cap funds. After the first 12 months of the market recovery, small- and mid-cap funds were starting to pull away from large-cap funds. The graph shows that the underperformance of large-caps versus small- and mid-caps was consistent during the last four-plus years.

Moreover, white paper published by Robeco signals that U.S. mid caps have delivered better returns than small and large caps over time, and they have done so without an inordinate amount of volatility. In fact, mid caps have experienced slightly higher volatility than large caps and less volatility than small caps. As a result, mid caps have not just outperformed, but they have done so with a lower level of risk than the rest of the market.

Another way to look at the relationship between risk and return is the Sharpe ratio, a measure of risk- adjusted performance. On this front, mid caps have displayed a superior risk-return profile than that of both small and large companies when measured over multiple time periods.

The small-cap funds universe is widely represented, with a lot of funds investing in this asset class, but finding funds in the mid-cap universe is more complicated. Sometimes they are included in the AllCap rankings, mixed with large and small cap funds, in other lists mid-cap is mixed with small-cap funds, making investment decisions more complicated.

According to Morningstar’s non US domiciled category of mid-cap funds, there are two funds with outstanding performance over a 3 and 5 year period: Robecos’s Robeco US Select Opportunities US Equities, and BNP Paribas’ Parvest Equity USA Mid Cap C, (Robeco’s volatility is lower, though).

Other funds with very good 3 year performance are AllianceBernstein’s AB US Small an Mid-Cap, Franklin Templeton’s Franklin US Small-Mid Cap Growth Acc $, Schroder’s Schroder ISF US Small & Mid Cap Eq I USD Acc and Pioneer Investments’ Pioneer Funds - U.S. Mid Cap Value I USD ND.

You may access Robeco’s White Paper on Mid Cap investing through the attached pdf file, or through this link.