EquitiesJul 14 2022

Why investors should look beyond headline large caps

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Why investors should look beyond headline large caps
(LUIS ROBAYO/AFP via Getty Images)

Matthew Miskin, co-chief investment strategist at John Hancock Investment Management, says mid-caps have seen some of the strongest earnings growth across capitalisation within the US equity market.

“We see mid-caps as a compelling, often overlooked part of the US equity market. They can be companies that are growing their way up into large-caps or, said another way, they can be the large-caps of the future.

“In addition, a secular theme we see benefiting US mid-caps is a relatively new phenomenon developing called onshoring. The US is seeing business come to the US as foreign locations are becoming less competitive and reliable for political or other reasons. US mid-caps are often the beneficiaries of these onshoring moves, whether in manufacturing, transportation, or real estate.”

We believe that today, many of the cutting-edge companies that growth investors seek reside in the mid-cap universeGeorge Sakellaris, Brown Advisory

George Sakellaris, a portfolio manager of the Mid-Cap Growth strategy at Brown Advisory, says history has shown that US mid-caps offer attractive long-term performance, and the range of companies in this part of the market is broader than perhaps is the case in the large-cap universe.

“In fact, we believe that today, many of the cutting-edge companies that growth investors seek reside in the mid-cap universe, in particular quality growth companies which have corrected substantially since November 2021.

“Lastly, we believe the mid-cap range offers investors a reprieve from two risks that have grown in other market segments: increased concentration in large-cap benchmarks and deteriorating quality in the small-cap universe.”

While not fully mature, mid-caps often have well-established business models, access to capital, experienced management teams and a foothold in their industry, yet their full growth potential may be unrealised.George Sakellaris, Brown Advisory

Citing the long-term performance record of US mid-cap stocks according to the Russell Midcap Index, Sakellaris says: “Broad equity market indices capturing the segment have outperformed their larger and smaller counterparts over time, in both absolute and risk-adjusted terms, and over multiple market cycles.

“While past performance may be eye-catching, we believe the diversity of high-growth, high-quality opportunities generated by recent market trends offers a compelling reason for investors to revisit their non-large-cap exposure.

“Currently, with more than 2,000 companies boasting market caps between $2bn (£1.7bn) and $50bn, this vast and eclectic segment of the US equity market combines high-quality, large-cap characteristics with the high-growth potential of small-caps. 

“Many mid-sized companies are migrating through a crucial juncture of their life cycles. While not fully mature, mid-caps often have well-established business models, access to capital, experienced management teams and a foothold in their industry, yet their full growth potential may be unrealised.

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