The middle child of 'cap' funds finally gets noticed
NEW YORK — Can you name a mid-cap stock? Identify a mid-cap mutual fund? Do you get all enthused reading about mid-cap companies?
The truth of the matter is that "No, No, No" is more often than not what you hear when you ask investors about mid-cap mutual funds. As comedian Rodney Dangerfield might say, "They just don't get any respect."
Yet, say fund experts, they should. "Mid-cap funds are sort of betwixt and between," says Bill Rocco, an analyst with information-firm Morningstar Inc., in Chicago. "It's sort of an amorphous concept that just escapes a lot of investors."
But it is also a mutual-fund class, says Mr. Rocco, that can put cash in your pocket. According to analysis by Morningstar, mid-cap mutual funds as a group have outperformed all diversified mutual funds for more than a year now. Even in the current down market they are ahead of the pack. So far in 2000, the 922 mid-cap funds tracked by Morningstar are up 1.6 percent. But that is better than the 0.9 percent average performance of all 3,978 diversified US equity funds.
For 1999 (an up year for the market), mid-cap funds shot up 35 percent; but diversified funds tracked by Morningstar rose only 27 percent.
Mid-cap stocks come in diverse sizes, depending on who does the classification. Kurt Brouwer and Stephen Janachowski, in their 1997 book "Mutual Fund Mastery," (Times Business) define mid-cap companies as having a market capitalization between $1 billion and $5 billion. (Market capitalization is the number of shares outstanding times the share price.)
But many fund managers "go up" when buying mid-cap firms. For example, Conrad Herrmann, manager of the Franklin Templeton California Growth Fund, a mid-cap fund, selects companies with a market capitalization as high as $10 billion. The fund is up 1.5 percent as of April 25.
What is important about mid-cap stocks, he says, is that they are the "middle children" of Wall Street, as it were - firms that have largely escaped from their riskier small-company status, but are not yet big established fellows, like GE or Microsoft.
That means they carry more built-in stability and tend to have greater access to liquidity than small-cap companies.
Many of them are also technology-oriented. Indeed, Mr. Herrmann's portfolio includes firms in the semiconductor and communications-equipment areas. Such firms, he says, are well-positioned for future growth, given the positive fundamentals for technology within the industrial world.
"Tech stocks make up about 50 percent of our portfolio," says Alex Vallecillo, manager of the Parkstone Mid-cap Growth Fund, up nearly 13 percent this year.
"The returns on mid-cap funds are about comparable to small-cap funds, yet without a lot of the volatility," he says.
Mr. Vallecillo looks for firms with strong revenues and high earnings growth. Companies in his portfolio include the semiconductor firms Altera and Xilinx. "The majority of our companies are still in the early phase of their growth cycle, but have gone through a lot of the risks faced by smaller firms," he says.
Marion Schultheis, manager of the J.&W. Seligman Capital Fund (a mid-cap fund) also carries a large technology segment. Although she sees the Nasdaq Composite Index largely moving "sideways" through late summer, she is upbeat about prospects for the technology sector in the fourth quarter, which begins in October.
Her goal, she says, is to be slightly overweighted in tech by then. Her fund, which is up 11.2 percent for the year through April 25, is beating major mid-cap market indexes, including the Russell 1000 (up 1.6 percent) and the S&P 400 Index (up 6.4 percent).
In the meantime, until tech fully kicks in, Ms. Schultheis likes smaller power companies such as El Paso Gas, which has a market capitalization of around $9 billion, plus selected generic drug companies and healthcare firms.
When investing in mid-cap funds, Morningstar's Rocco says it is important to know the fund's investment style, such as growth, value, or a blend of both.
But more important, he says, is whether the manager can more or less buy small companies, which may actually include some small-cap firms, as well as larger companies that just barely qualify for mid-cap status.
This type of "full-spectrum" mid-cap fund gives the manager more flexibility than managers of mid-cap funds that are limited to only companies that fit within pre-set capitalization levels, say, between $2 billion and $8 billion.
But investors have to do their legwork, he says, in finding out how the fund buys firms for its portfolio. That means making some calls and checking out portfolios.
(c) Copyright 2000. The Christian Science Publishing Society