Mid Cap Stocks occupy a unique place in the market capitalisation continuum around the $2bn to $10bn space. At this stage in the economic cycle professional investors are turning to Mid Cap stocks to solve two main issues.
1. Optimising Risk Budgets
The U.S. Mid Cap universe is 'represented' by stocks 201-1000 within the Russell 1000 index i.e. they just fall outside of the largest 200 US stocks which are the most covered by broker research. This last point is what makes them specifically interesting:
With less broker coverage, the opportunity for active managers to uncover hidden gems that can add alpha to their portfolio is more prevalent.
And at the same time, the volatility of the mid-cap universe only tends to be 10-20% higher than the entire Russel 1000. In other words, there is potential return per unit risk enhancement to be found by specialised active mid-cap managers.
2. Balancing Style Risk
Style risk is not always a factor to which investors wish to have an exposure bias - either on the growth or the value side. But it can exist as a result of benchmark choice, or market capitalisation exposure.
In many cases, much of the small cap universe is dominated by 'young' companies growing fast. And at the other extreme, large caps exhibit slower growth but are are often mature, stable and highly diversified businesses.
Mid Caps arguably fill the gap in the portfolio reserved for above average earnings growth companies (unlike large caps) without the 'newbie' business risks associate with smaller companies.
In short, investors are now looking for both quality and earnings growth, from companies that are less well known by the market. And ideally, who are in a position to capture and monetize long term trends.