Plan sponsors are reaching for midcap because more small-cap strategies have hit peak capacity following strong performance in recent years, said Roz Hewsenian, managing director at Wilshire Associates Inc., Santa Monica, Calif.
"We're seeing more interest in midcap than we have previously because a lot of small products are closed," she said.
Managers with dedicated midcap offerings, as well as small-cap to midcap strategies, are more than happy to serve the overflow. Ariel Capital Management LLC, Chicago, has won three accounts for the midcap Ariel Appreciation Fund and one account in its midcap value tax-exempt strategy since the beginning of the year, said Roopa Patel, vice president.
"There are still (investors) who don't have a dedicated manager," said Mellody Hobson, president of Ariel Capital, noting that her firm sees midcap holes to fill, especially on the 401(k) side.
EARNEST Partners, Atlanta, has 10 new midcap equity accounts this year, according to institutional research firm eVestment Alliance, Atlanta. That compares with seven in all of 2004. Trey Greer, partner at EARNEST, declined to comment.
Chicago Equity Partners LLC, Chicago, has won nine midcap core equity accounts since early January, eVestment Alliance found. So far, that is consistent with the nine accounts brought on in all of 2004.
"The (midcap) space has done well," said Patrick Lynch, president at Chicago Equity Partners. "(It is) is a pure play on the U.S. economy. Smaller companies are targets for M&A activity by bigger companies, and plan sponsors want to make sure they have exposure there."
The $13 billion Kentucky Teachers' Retirement System, Frankfort, is among institutional investors looking to fill a new midcap allocation. On the advice of its consultant, Chicago-based Becker, Burke Associates Inc., the system decided putting $300 million into active midcap growth would be a "sound investment to diversify our portfolio," said Gary Harbin, executive secretary.
"We would not have to depend so much on large-cap stocks to do it all," Mr. Harbin said, noting that the board will likely announce a hiring decision at its Sept. 2 meeting. He declined to offer more details.
Chicago Equity's Mr. Lynch said many of his clients don't want to miss out on midcap exposure. "Historically, plan sponsors (used) large-cap managers that perhaps cheated down a bit and small-cap managers that cheated up a bit, and midcap was taken care of, vs. having a dedicated commitment to the space," he said.