Shining a light on mid-cap value

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[ "Kari Montanus" ]
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Kari Montanus, Senior Portfolio Manager, Head of Focused Mid Cap Value and Focused Small Cap Value Team

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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.

 

Line chart showing the growth of $100 from an initial investment in 2002 through March 31, 2022. An investment in mid-cap value stocks would have outperformed an investment in either small- or large-cap value stocks.

 

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.

 

Bar chart showing the Sharpe Ratio for small-, mid- and large-cap stocks over periods of 1, 3, 5 and 10 years as of 3/31/2022. Sharpe ratio is the average return in excess of the risk-free rate divided by the standard deviation of return; it is a measure of the average excess return earned per unit of standard deviation of return. Mid-cap stocks have outperformed on a risk-adjusted basis over each period.

 

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.

 

Line chart showing the premium paid for mid-cap growth stocks compared to mid-cap value stocks from 3/31/2002-3/31/2022. The price investors pay for forecasted earnings is historically higher for mid-cap growth stocks compared to the historical average.

 

Bottom line

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.

 

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