As the forgotten middle child of investment strategies, midcap stocks often don't get the attention that they merit from institutional investors.
Many institutional investors expect exposure to midcap stocks through their large- and small-cap allocations, but the universe of midcap stocks is much broader than investors think, covering companies from $2.5 billion to $35 billion in market capitalization. Depending on the fringes of a large- or small-cap allocation doesn't assure exposure.
It's a missed opportunity, according to Eric Mintz, portfolio co-manager of the Mid Cap Growth Strategy at Eagle Asset Management, an affiliate of Carillon Tower Advisers. Having a dedicated midcap allocation can provide increased growth potential with a favorable risk-reward profile.
Since the Russell Midcap index started in 1979, midcaps have outperformed small-cap stocks on every rolling 10-year period, and they beat small- and midcap stocks combined 90% of the time. Midcap stocks outperform large stocks 73% of the time.
“Midcaps have built a pretty impressive track record of outperforming, and while they do succumb to corrections in a bear market, they're nowhere near as punitive as what we see in the small-cap universe,” Mintz said.
Indeed, midcaps have outperformed all other stock classes for the majority of rolling one-, three- and five-year periods over the past four decades. So investors should consider them when they're searching for the higher returns they often look for in small caps.
Midcap stocks benefit from having more liquidity, typically, and the companies generally have stronger management teams than small-cap companies. Midcaps also have less volatility as they move beyond the startup phase of a business. When the stock market plunged at the end of 2018, small caps fell further than midcaps and ended the year in a weaker position.