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With a track record of outperformance relative to both smaller and larger companies, mid-cap stocks are worth a look for value investors.
There’s a part of the equity market that is often overlooked despite long-term compelling performance: mid-cap value.
The equity investment conversation typically focuses on the rotation between large-cap and small-cap stocks or between growth and value. But for value investors, mid-cap — which is used to describe companies with a market capitalization of between $450 million to $70 billion — has consistently outperformed relative to its large-value and small-value counterparts over time and deserves specific consideration.
Mid-cap stocks have unique attributes, combining the return potential of smaller companies with the management and operational stability of established businesses. This historically has resulted in consistently higher risk-adjusted performance relative to small- and large-cap value stocks.
Why mid-cap value in the current environment
While past performance is no guarantee of future results, persistently high inflation and rising interest rates historically have tended to benefit mid-cap value companies. Sectors typically associated with value stocks, such as financials, materials and energy, generally have outperformed relative to growth in rising-rate environments — and particularly so in the current environment since mid-2020.
Mid-cap value also remains cheap relative to growth stocks and compared to history.
Mid-cap stocks present a compelling opportunity for value investors, based on historically higher risk-adjusted returns relative to small- and large-cap value. We believe mid-cap value remains reasonably valued on a relative basis and is well-positioned for the challenges and opportunities of the current market environment.