The Case for Mid-Cap Stocks: There's More in the Middle

The investment importance of mid-cap stocks is somewhat misunderstood and frequently overlooked by investors. Despite having little exposure within investor portfolios, mid-caps have long provided more opportunities for long-term growth than large-cap and small-cap stocks. These opportunities include the potential for greater long-term returns than large-cap stocks with less risk and volatility than small-cap stocks.

Outperformance

20-year annualized returns as of 12/31/16

Source: Bloomberg

For the 20-year period ending December 31, 2016, mid-cap stocks outperformed both large caps and small caps by 2.12% and by 1.73%, respectively.

Mitigate Risk

20-year Standard Deviation of returns as of 12/31/16

Source: Bloomberg

In addition, for the 20-year period ended December 31, 2016, mid-cap stocks delivered these solid returns with less volatility than small-cap stocks (17.06 vs. 20.07). A lower Standard Deviation is an indication of less risk.

Better risk-adjusted returns

20-year Sharpe Ratio as of 12/31/16 

Source: Bloomberg

Combined, these characteristics yield a better risk-adjusted return than either large-cap or small-cap stocks. The Sharpe Ratio is a measure of reward per unit of risk. The higher the Sharpe Ratio, the better the index has performed in proportion to the risk taken. Over the 20-year period ended December 31, 2016, mid-caps have a Sharpe Ratio of 0.52 vs. 0.43 and 0.39 for large- and small-cap stocks, respectively.

Mid caps offer the best of both worlds
With mid-cap companies, there is an opportunity to get the best of both worlds. Large companies are typically well known, mature, and established, enabling them to garner a significant portion of core investable assets. On the other hand, small companies tend to be start-ups with a reputation for accelerated growth. In the middle of the equity universe are frequently overlooked mid-size companies that combine some of the best attributes of small and large companies. These include:

• Seasoned management teams
• Sound infrastructure and technology
• Broad distribution channels
• Dominant market presence
• Greater access to capital
• Nimble and entrepreneurial with less bureaucracy

Overlooked and underexposed
While the opportunities in mid-cap stocks are clear, investors remain underexposed to mid caps. Currently, mid caps make up approximately 27% of the U.S. equity universe, but only 14% of U.S. mutual fund assets are within Morningstar mid-cap categories. One reason for this may be the lack of research analyst coverage of mid-size and smaller companies. Less coverage can translate into greater opportunities to exploit market inefficiencies within the mid-cap space. 

Sources: Bloomberg and Morningstar as of 12/31/16. 

Many investors have allocations to small- and large-cap stocks, but they may be missing an opportunity for greater growth potential if they don’t consider an allocation to mid caps.

Meeder Quantex Fund (FLCGX): A Proven Mid-Cap Solution
Consider Meeder Quantex Fund (FLCGX) for your clients’ allocation to mid caps. The Fund is a proven mid-cap solution that incorporates a time-tested, model-driven process to select stocks with strong growth potential. We believe the greatest growth potential comes from companies deemed to be “fallen angels.” Our definition of "fallen angels" are companies which have fallen substantially from all-time highs or are being impacted by a near-term disruption to their business.

Outperformance among mid-cap peers
Annualized returns for the 10-year period ending 12/31/16

Sources: Bloomberg and Morningstar as of 12/31/16.

Meeder Quantex Fund (FLCGX):

Featured in Money Magazine

 The Meeder Quantex Fund is a proven mid-cap solution, recently recognized by Money magazine as a “Best Performer” among all mid-cap funds.

Read the full article.

The performance data shown represents past performance, which does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. For current month-end performance data, visit www.meederinvestment.com. 

Investors are advised to consider carefully the investment objectives, risks, charges and expenses of the fund before investing. The prospectus contains this and other information about the funds. Contact us at the address below to request a free copy of the prospectus. Please read the prospectus carefully before investing. 

Investment performance assumes reinvestment of all dividend and capital gain distributions. Returns for less than one year are not annualized. Performance data reflects a contractual agreement by the advisor to waive fees or reimburse expenses until October 15, 2017. The agreement may be terminated annually by the adviser on its renewal date. Without these waivers, performance would have been lower. 

The gross expense ratio reflects the total fund operating expense ratio gross of any fee waivers or expense reimbursements as set forth in the current prospectus. The net expense ratio is the audited ratio of net expenses to average net assets as set forth in the fund’s most recent annual report, which may include the effect of voluntary fee waivers or expense reimbursements. 

The Russell Midcap Index measures the performance of the mid-cap segment of the U.S. equity universe. The Russell 1000 Index measures the performance of the large-cap segment of the U.S. equity universe. The Russell 2000 Index measures the performance of the large-cap segment of the U.S. equity universe. These indices are unmanaged and cannot be purchased directly by investors.The Lipper Mid-Cap Value Funds Index performance includes mutual fund expenses, such as investment management fees, which are not identical to the expenses charged by the Fund. The Morningstar Mid-Cap Value Category represents the Morningstar Category average return for the group shown. All indexes assume reinvestment of interest and dividends. Indexes do not take into account management fees or expenses associated with a mutual fund. One cannot invest directly in an index. 

Key Definitions: Standard Deviation measures the annualized variation of the fund’s performance against its mean over time. A higher standard deviation is an indication of greater volatility. Sharpe Ratio is a risk adjusted measure of excess return that compares a fund’s performance with a risk free return. A higher Sharpe ratio indicates better risk-adjusted performance. 

Meeder Funds are distributed by Adviser Dealer Services, Inc., an affiliate of Meeder Investment Management. An affiliated registered investment adviser, Meeder Asset Management, Inc., serves as the investment adviser to Meeder Funds and is paid a fee for its services.