In this episode of KayneCast, host Jordan Greenhouse talks with Jon Christensen, portfolio manager of Kayne Anderson Rudnick’s Mid Cap portfolio, about the impact of new COVID-19 variants and inflationary pressures on the stock market and Mid Caps during the latter half of 2021 and what to expect from Mid Caps in 2022.
High-Quality Companies and the Mid Cap Index
Lower quality equities led the first half of 2021, with fundamentals becoming more of a focus in Q4 2021. Key drivers for this shift included the emergence of new COVID-19 variants, coupled with inflationary pressures caused by disruptions in the production of raw materials and supply chain issues. Labor shortages also added fuel to the fire.
The result was an emphasis on higher-quality businesses beginning in Q3 2021 and continuing into Q4. Sectors such as Real Estate, Utilities, and Materials led the way, with Communication and Healthcare losing ground. Christensen notes that “In terms of quality metrics, higher quality S&P stock ranking stocks were strong, and those with lower betas were also solid performers versus their high beta counterparts,” and that “overall the market year for the year was very even on a high vs. low-quality basis for the Russell Mid Cap – maybe a slight edge to high quality – but reflecting the tale of two markets we saw in 2021.”
Q4 2021 Contributors and Detractors for Mid Caps
Listen to the podcast above to learn more about the top contributors and detractors in KAR’s Mid Cap Core strategy for Q4 2021.
Mid Caps in Growth Mode Moving into 2022
Christensen highlights that the possibility of new COVID variants and the financial challenges of inflation and supply chain issues continue to create volatility in the market, something that some investors may find difficult to ride out if they take a reactive view of performance and possible losses. Christensen goes on to explain that KAR’s goal is “to find those businesses that have temporary valuation disconnects that we can take advantage of while riding out the ups and downs of the market by having stocks that can persevere during these uncertain periods. This means we need to have patience and diligence in researching these companies while monitoring our existing holdings for changes in their structural investment stories. But our mandate is clear and consistent as we focus on high-quality businesses that we believe should outgrow their markets over the long-term and take advantage of this market volatility.”
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This information is being provided by Kayne Anderson Rudnick Investment Management, LLC (“KAR”) for illustrative purposes only. Information contained in this material is not intended by KAR to be interpreted as investment advice, a recommendation or solicitation to purchase securities, or a recommendation of a particular course of action and has not been updated since the date of the material, and KAR does not undertake to update the information presented should it change. This information is based on KAR’s opinions at the time of the recording of this material and are subject to change based on market activity. There is no guarantee that any forecasts made will come to pass. KAR makes no warranty as to the accuracy or reliability of the information contained herein.