Page 470 - DCAC February 2024 Files

The Case for Mid Cap Equities

Brett Minnick, CFA Sydney Aeschlimann
Vice President Senior Analyst

Mid-cap equities, like middle children, can often be overlooked. It
is easy to be captivated by large-cap equities, with their impressive
scale or an up-and-coming small-cap tech company that is slated to
be the next big thing, but nestled between these two extremes are
mid-cap companies. With market capitalizations ranging from $2
Billion to $10 Billion, mid-cap companies inhabit a sweet spot in the
market, balancing growth potential and security.
Mid-cap equities include components of both small- and large-cap
stocks. Small-cap equities can be unpredictable and volatile and
large-cap equities may have already experienced most of their
exponential growth. Mid-cap companies often offer a more balanced
approach, with the opportunity for considerable growth along with
better stability. In many instances, mid-cap companies are more
than just a good idea. Many have a demonstrated history that they
can prosper through various market conditions in their respective mitigate unsystematic risks pertaining to company size and certain
industries, providing investors with desirable returns. sectors of the economy.

Rapid growth and expansion are common traits of mid-cap companies; Market cycles are dynamic, and what has been performing well
new ideas and products are generated and tested leading to market recently may not continue to do so. For many years, the markets
expansion and brand recognition. This growth potential can lead have favored large technology stocks like Apple and Alphabet.
to significant capital appreciation over time, especially if these The S&P 500 Index, which holds the 500 largest publicly-traded
companies transition into large caps. Apple, Amazon, Alphabet, and companies in the U.S., including the large technology names, has
many other well-known large companies were once mid-cap stocks. become incredibly concentrated. As of mid-August, the largest ten
Successful companies can experience significant growth over time, stocks in the index have accounted for around 90% of its year-to-
moving from mid- to large-cap status as their businesses expand and date return in 2023. Investors looking to truly diversify their assets
market capitalizations increase. Investing during the mid-cap phase from a size and sector perspective might consider the addition of
can yield substantial returns if they continue to innovate and grow. mid-cap equities to diversify some concentration risk away from the
Another benefit of investing in mid-cap equities is that they large-cap markets.
typically trade at lower valuation multiples compared to large-cap When it comes to performance, mid-cap equities have demonstrated
equities. Investors can participate in companies with strong growth their superiority over longer time periods. The Russell Mid Cap Index
opportunities and avoid paying the premium valuations that typically has outperformed large and small cap equities in a majority of the
accompany investing in large companies. For example, the price- 10-year rolling time periods in the past 20 years as well as the 20-
to-earnings ratio for the Russell Mid Cap Index was 17.99 as of year return.
8/31/2023, whereas the Russell 1000 index had a price-to-earnings Mid-cap equities are often overlooked, but it is this underestimation
ratio of 21.92. that can make them a great opportunity. They can play a pivotal
Diversification benefits are another compelling reason to include role for long-term investors, offering growth, diversification, and
mid-cap equities in an investment portfolio. A well-balanced and valuation benefits. Rather than likening mid-cap equities to middle
diversified portfolio allocates risk in a variety of ways, including children, consider them more akin to the middle finger. While it
across various asset classes and market capitalizations. Adding might seem unremarkable at first glance, it can make a significant
mid-cap equities to a portfolio of large- and small-cap equities can impact when employed effectively.

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