Employing mid-caps as a means to broaden investment beyond U.S. borders
Amidst uncertainties and volatility in the US mega-cap stock market, investors seeking diversification may find global mid-cap stocks an appealing alternative, according to analysis by Aberdeen Asset Management.
For those with a significant portion of their portfolio in US stocks, global mid-cap equities could present an appealing opportunity when looking for diversification.
Compared to large-cap stocks, global mid-caps (as defined by the MSCI World Mid-Cap Index) have a lower exposure to the US stock market, with a 62% weighting compared to the MSCI World Index's 72%.
Anjli Shah, manager of the Aberdeen SICAV I - Global Mid-Cap Equity Fund, encourages investors to consider adding a specific allocation to mid-caps in their portfolios due to the diversification benefits they offer.
Similarly, Ben Seagar-Scott, chief investment officer at Forvis Mazars, advises investors with a substantial equity portfolio to consider mid-cap stocks, as they offer a higher number of opportunities for actively finding undiscovered gems while also providing a good route to diversify away from mega-caps.
However, Seagar-Scott cautions that mid-caps may have higher volatility than larger counterparts, particularly in specific sectors where size matters and large companies can dominate.
One advantage of mid-caps is their comparatively lower valuations compared to large firms, despite providing better returns than their larger peers over the past 25 years.
Investors have pulled less money out of global mid-caps during the current market sell-off, which suggests this segment may be attractive in the current market turmoil.
To illustrate, as of April 27, the cumulative return year-to-date for the MSCI World Mid-Cap Index was -0.47%, significantly less than the MSCI World Index (-1.94%) and the MSCI World Small-Cap Index (-4.10%).
Shah highlights that mid-caps can potentially offer lower levels of risk than small-caps since companies that have made it from small to mid-cap tend to have established and resilient business models while remaining nimble. Furthermore, market inefficiencies create opportunities for investors to find hidden gems, especially as mid-caps are often under-researched and under-covered compared to large-caps.
Recently, renewed investor attention has focused on the UK mid-cap sector due to its superior earnings growth, stronger domestic focus, and a persistent valuation gap relative to large caps. The UK Mid-cap sector offers the potential for higher returns than large caps with lower levels of risk than small caps.
In particular, the Dunedin Income Growth Investment Trust believes that UK mid-caps provide distinct advantages over the FTSE 100, as 50% of FTSE 250 revenues come from the UK, making them more closely aligned with domestic economic trends. Maclean projects that UK mid-cap earnings growth will outpace FTSE 100 in the near future.
Moreover, UK equities currently remain undervalued, with the UK market trading 20% below its long-term average price-to-earnings (p/e) ratio, and the FTSE 250 at a 20-year low in p/e discount relative to the FTSE 100.
Meanwhile, wealth managers are becoming increasingly pessimistic about US assets in Q1. According to the ARC Market Sentiment Survey, sector sentiment was 4% net negative towards US assets compared to 36% net positive a year ago. While many investment firms made no changes, those that did primarily reduced US equity exposure, particularly in large caps and technology stocks, with some increasing exposure to US small and mid-caps.
As we move forward, investors may find mid-cap stocks and funds a strategic addition to their portfolios, offering potential higher returns with lower volatility compared to small-caps, while also diversifying away from large-cap exposure. By considering mid-caps as part of a well-balanced investment strategy, investors can position themselves to benefit from the sector's growth potential while mitigating some of the risks associated with wider market volatility.
- Investors interested in personal-finance strategies might consider adding mid-cap stocks to their portfolios, as they offer the potential for higher returns with lower volatility compared to small-caps.
- In the realm of global finance, mid-caps, particularly those in the UK, are gaining attention due to their superior earnings growth, stronger domestic focus, and persistent valuation gap relative to large caps.
- Technology and social-media giants are facing reduced investment exposure, as wealth managers are becoming increasingly pessimistic about US assets, particularly large caps and technology stocks.
- Amidst the turmoil in the US stock market, some investors are finding appeal in global mid-cap equities, as they have comparatively lower valuations and have seen less capital outflow during the current market sell-off.
