Far From Middling
Mid caps are generally companies valued between $2 billion and $10 billion in market capitalization, but these limits can vary. Basically, they make up the often-overlooked category in the equity market between the well-known, headline-news large caps and high-growth-potential small caps.
Many investors believe owning stocks in the large and small categories give them sufficient exposure across the spectrum. So, mid caps tend to be overlooked. Still, they have had an impressive run over the past couple of decades and deserve a dedicated allocation in your portfolio, where they may help boost return and lower risk.
The Three Bears
Mid-cap stocks have strong fundamental characteristics that position the asset class as having some of the best attributes of its large- and small-cap counterparts.
Large caps — Well-established. More likely to pay dividends. Typically more limited growth potential.
Small caps — High growth potential. May exhibit more volatility.
Mid caps — Small enough to have relatively high growth rates, but mature enough to have proven business plans.
Mid caps typically have better historical earnings per share growth than large caps. Compared to small caps, they have historically shown higher income potential, a greater ability to generate capital, and more consistency in profitability.
These characteristics are some of the key reasons mid caps have steadily outperformed their larger and smaller peers over the past 20 years.
Active Management Can Create Value
Because mid-cap equities are relatively overlooked in the market, they offer significant opportunities for active portfolio managers to add value. Mid-size companies generally receive less research coverage than the large caps. Deep dives into this area of the market can uncover quality companies that are underrepresented in investment assets and can offer potential for strong returns.
At Kayne Anderson Rudnick, we encourage investors to consider making mid-cap stocks a meaningful allocation in their well-diversified equity portfolios. Read more about the strengths and historical performance of mid caps and our Mid Cap Core and Sustainable Growth strategies.