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Mid-cap stocks are often called the forgotten, overlooked corner of equity markets, but that shouldn’t be the case and historical data prove as much.
Focusing more on the start to 2023, mid-caps are living up to their reputation for outperforming as the S&P MidCap 400 Index is beating the S&P 500 by a noteworthy margin. Indeed, a month and some change is a short time frame, but it could augur well for more upside for this asset class as 2023 unfolds.
Plus, advisors with client bases that aren’t intimately familiar with mid-caps don’t have to stretch to articulate the benefits of this segment of the market. One way – an accurate one at that – for advisors to articulate mid-caps to clients is this is a market segment with superior growth prospects relative to large-caps and better balance sheets, broadly speaking, compared to smaller companies.
Compelling Reasons to Explore Mid-Caps This Year
As noted above, mid-caps are frequently overlooked and that scenario is, unfortunately, exacerbated when it comes to the group’s income and value prospects. Advisors need not fear because mid-caps are credible income generators and the combination with value is potent over the long-term.
Owing to the fact the group is often glossed over by market participants, so too are some of the favorable nuances associated with mid-caps, including the group’s penchant for relative durability in times of economic duress – a point to consider, particularly if a recession arrives later this year.
“Looking at annual total return from 2009, mid caps similarly outperformed over four out of the five years after the global financial crisis. Not only did they also perform well compared to the small-cap segment post-recession, but the cumulative returns from the start of 2000 through December 2022 show the Russell Midcap Index far outpaced the large-cap Russell 1000 Index with returns of 598% versus 334%,” notes Dina Ting, head of global index portfolio management at Franklin Templeton.
It’s not just the global financial crisis. The Russell Midcap Index outperformed comparable large- and small-cap benchmarks following the recessions that were spurred by the bursting of the dot-com bubble and 9/11 terrorist attacks, the 1991 Gulf War recession and the 1980 and 1982 energy crises.
Of course, market history doesn’t always repeat, but it often rhymes. Another perk with mid-cap funds, which are effective avenues for accessing this group, is that they are often more diverse than their large-cap rivals.
“Investors also tend to be underallocated to mid caps. Based on overall market capitalization, we might expect funds to allocate three times as much to large caps compared to mid caps. However, investment in large-cap mutual funds and ETFs is about seven times more than that of their mid-cap peers.4 Market observers have lamented that US large caps have,” adds Ting.
Fun with Factors
As noted above, there’s value to be had with mid-cap equities and over the long haul, mid-cap value has been a potent combination. That said, the current environment could reward multi-factor approaches to stocks in the middle.
“The value factor—which emphasizes inexpensive stocks relative to their fundamentals—performed better than the broader market last year, with the S&P MidCap 400 Pure Value Index returning -3.6% against the S&P MidCap 400 Index, which was down about -13% for the year,” writes Ting. “By comparison, momentum stocks, which tend to show ongoing positive price trends, underperformed the most in 2022. Quality-tilted stocks, marked by profitable companies with capital efficiency and low volatility traits, together helped hedge against risks.”