Sometimes we can all miss something which is staring us straight in the face – and for investors it is no different. 
Some investors are cautious and simply want exposure to household names, while others want to be the early adopters of fast growing companies that offer an exceptional upside. Neither is wrong – but you can also have the best of both worlds.
This oversight has been highlighted in recent years. On the one hand large growth companies have stolen the headlines (think of the likes of the FAANGs - Facebook, Amazon, Apple, Netflix and Alphabet) due to their unprecedented levels of growth, while smaller companies have proven themselves to be exceptionally resilient globally – with their post sell-off performance a classic example of this.
Then we have mid-caps. For investors, a mid-cap company may be appealing because they are expected to grow and increase in profits, market share, and productivity; they are in the middle of their growth curve. Since they are still considered to be in a growth stage, they are deemed to be less risky than small-caps, but more risky than large-caps.
The stars appear to be aligning for this segment of the market. Not only do many mid-caps sit in sectors which are benefitting from the re-opening play, but exposure to mid-caps has historically been a stronger inflation-hedge when compared to their smaller and larger peers.
For those who are wary of higher interest rates. Mid-caps have also shown a greater resiliency in this environment. Mid-caps are also historically shown to be more tied to their domestic economy (particularly in the developed world) – so higher interest rates resulting from stronger economic growth can also boost future earnings for this segment of the market.
With this in mind – here are a few mid-cap funds for investors to consider:
UK – AXA Framlington UK Mid Cap
Resiliency has been the buzzword for UK small-caps in recent years – but it also applies to mid-caps, particularly on the back of the pandemic. Since the lows of March 2020, the FTSE 250 has risen more than 83%, comfortably beating the FTSE All Share and the FTSE 100.
There is an argument that UK mid-caps do not look particularly expensive given the UK recovery is still lagging compared to other parts of the world. The FTSE 250 is composed over many sectors and companies which have faced significant challenges due Covid (airlines, travel companies, restaurants and pub chains) many of which have only begun to recover.
Managed by Chris St. John, the AXA Framlington UK Mid Cap fund targets UK companies that are benefiting from structural tailwinds. Chris will look for companies that are high quality (both financially and in terms of their management teams) that can show sustained profitability, and that exhibit future growth potential.
US – Schroder US Mid Cap
The US offers a great example of how overlooked this segment of the market often is. Research from Bank of America Merrill Lynch shows that for every $1 invested in mid-caps in 1978, it would be worth $199 today - versus $181 for small-caps and $139 for large-caps on a total return basis.
Schroder US Mid Cap manager Bob Kaynor and his team have three sources of stock returns. 'Steady eddies' or less cyclically-sensitive stocks act as ballast in the portfolio. 'Mispriced growth' are stocks where Kaynor feels the market has not fully understood the company's earnings potential. The last, and smallest, bucket is ‘recovery-type’ situations.
Kaynor says cyclical sectors make up more than half of small- and mid-caps in the US, something he feels will see this segment of the market benefit strongly from the ongoing economic recovery.
Global - Aberdeen Standard SICAV I Global Mid Cap Equity
Aberdeen Standard SICAV I Global Mid Cap Equity co-manager Anjli Shah says the attraction of mid-caps is that companies in this segment typically dominate their respective niches, operate in attractive industries, are not dependent on external factors to succeed, have strong and stable management teams and attractive environmental, social and governance (ESG) credentials.
This fund is an extension of ASI’s successful small and mid-cap desk and targets the ‘next 15%’ in market cap size up from smaller companies. The process is based around ASI’s powerful screening tool 'Matrix' (which looks for quality, growth and momentum factors). The final portfolio consists of 40-80 companies.
Emerging markets and ESG - Federated Hermes Global Emerging Markets SMID Equity
As mentioned above, mid-caps also tend to have strong ESG credentials. The mid-cap managers we speak to also tell us they find it far easier to engage with management in this portion of the market about improving aspects of their business.
A fund worth considering here is Federated Hermes Global Emerging Markets SMID Equity. As with all Federated Hermes funds, ESG is an integral part of the investment process, with this fund avoiding stocks involved in the likes of fossil fuels, tobacco and weapons.
The fund will usually have about a 50:50 split between small and mid-caps, and is also likely to have big overweight to China and South Korea, as both countries have large numbers of smaller companies that fit the desired investment characteristics. The fund can also invest in frontier market should opportunities arise.
Darius McDermott is managing director at Chelsea Financial Services.
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. McDermott’s views are his own and do not constitute financial advice.