PHILADELPHIA — Mid-cap stocks rank among the best-
performing mutual funds, but they remain a tough sell to investors, industry experts say.
Year-to-date through last Tuesday, the three top-performing
categories among diversified stock or bond funds at Chicago-based Morningstar Inc. were mid-caps: Morningstar Mid-Cap Growth, up 9.91%, Morningstar Mid-Cap Value, up 9.82%, and Morningstar Mid- Cap Blend, up 9.80% — compared with a 6.28% gain for the Standard & Poor’s 500 stock index during the same period.
Despite their performance, mid-caps “are kind of forgotten,” said Jeff Tjornehoj, a Denver-based senior research analyst with Lipper Inc. of New York.
Most investors think in terms of just small- or large-cap investments, he said.
Recent fund flows back Mr. Tjornehoj’s claim.
In March, more money flowed into funds in the large-blend category ($6.56 billion) than into funds in any other Morningstar category, according to the most recent data from Financial Research Corp. of Boston.
Funds in the mid-cap-value category pulled in $1.38 billion for the month — the most for any mid-cap category — placing it 15th among all fund categories ranked by net flows.
Financial advisers said that investors ignore mid-cap stocks at their peril.
“I think mid-caps are the ugly stepchild of asset allocation,” said Nicholas Spagnoletti, a partner with Macro Consulting Group LLC in Parsippany, N.J.
But without them, investors may not be properly diversified, he said.
Other advisers agree.
“Our biggest [allocation] is in the mid-cap-growth area,” said Scott Kays, president of Kays Financial Advisory Corp. in Atlanta. “It’s paid off in spades for us.”
Default position
But will mid-caps continue to pay off?
“Every now and then, we see markets where mid-caps blow away the competition,” Mr. Tjornehoj said. “But they don’t typically last long.”
Mid-cap categories are the top performers a year or two at most, Mr. Tjornehoj said.
It is one reason mid-cap investments are seen by investors as “kind of a default position” until it can be determined more easily which direction the market is heading, said James Paulsen, Minneapolis-based chief investment strategist with Wells Capital Management Inc. of San Francisco.
Investing in mid-caps, however, should be seen as more than a default position, said Robert C. Lanphier IV, a principal of
William Blair & Co. LLC of Chicago and manager of the $33 million
William Blair Mid Cap Growth fund and the $107 million
William Blair Small-Mid Cap Growth Fund.
Although small-cap stocks have until recently gotten most of the attention, mid-cap stocks have been right behind small-caps in terms of performance and have outperformed the broad market for a number of years, he said.
Although small-cap stocks have lost some of their luster — the result of overvaluations and concern over the economy — there is nothing to suggest that the same will soon happen to mid-cap stocks, Mr. Lanphier said.
Mid-cap stocks still don’t look expensive, and investors looking to get “juice” from younger companies will still want to stay with mid-cap stocks, he said.
It seems likely that mid-caps will continue to outperform, agrees Jack Ablin, chief investment officer of Harris Private Bank, a unit of Harris Bankcorp. Inc. in Chicago.
Not only do they not seem overvalued, especially when compared with small-cap companies, mid-cap companies have been prime targets of mergers-and-acquisitions activity, he said. That has driven up the value of their shares, and that will likely continue, Mr. Ablin added.
That doesn’t mean, however, that he sees much value in mid-cap-only funds.
“If you’re an asset allocation nut, and you’re looking at diversifying your portfolio and adding efficiency,” adding mid-cap-only investments to the mix doesn’t do much, because they are so closely linked to small-cap investments, Mr. Ablin said.
That view has led Harris to hire managers who view mid- and small-cap investments together, he said.
