Funds Making the Most of the Market's Middle
If you're looking for funds with a hefty stake in medium-sized companies, read on.
Middle children often complain that they receive less attention than their older and younger siblings, and the same may be true for mid-cap funds. In the early part of this decade, small-cap funds were star performers, and large-caps often get central billing as core funds in individuals' portfolios. But mid-cap funds deserve their share of the spotlight. They are the best-performing diversified funds over the past five years, and they've held up relatively well during the market turmoil in recent months.
We crafted a screen to find some of the purest mid-cap options, with other attractive traits to boot. Funds that fall into the Morningstar mid-cap growth, mid-cap blend, and mid-cap value categories are mostly invested in the stocks of businesses with market capitalizations between $1 billion and $8 billion. A bird's-eye view of each of these categories showed that the typical fund held between 54% and 57% in mid-cap stocks and had average market capitalizations of around $6 billion as of July 15, 2008.
First, we set an average market cap ceiling of $8 billion, and to keep the list light on small-cap stock funds, we required that less than 20% of assets be invested in each of the following categories: small-cap growth, small-cap blend, and small-cap value. As per our usual, we required that the funds be open to new investments of $10,000 or less along with below-average expense ratios. And by pulling funds with top-third 10-year trailing returns, making sure the current managers were responsible for those records, we'll see options that endured the last bear market of 2000-02 and shot forward during the turbocharged years that followed for mid-cap stocks.
There were just a handful of results as of July 15, 2008:
These funds' total stakes in mid-cap stocks ranged from 44% to 88% and their average market capitalizations fell between $2.7 billion and $7.9 billion. We'll highlight a couple of our favorites from this short list.
This is a favorite (and quite unusual) fund in the mid-cap growth category. We're not big on many funds with managers who use earnings momentum as their guide, but this fund has been very successful over the long term. Bill D'Alonzo, the fund family's CEO and manager of this offering, has a small army of analysts who help him find stocks that will beat Wall Street's expectations in the near term. A constant stream of communication between the analysts and the firms' suppliers, customers, and rivals allow D'Alonzo to jump on stocks that are about to post surprisingly strong earnings. The stocks don't typically sit for long in this portfolio; fast trading is a necessary consequence of the Brandywine formula. When a stock's valuation gets stretched or a better opportunity arises, the company's stock is sent packing. That kind of trading can lead to capital gains distributions, so we'd certainly keep this fund in a tax-sheltered account.
Vanguard Mid Capitalization Index (VIMSX)
Unlike the above fund, this fund's low turnover makes it perfectly suited for taxable accounts. Manager Donald Butler tracks the MSCI U.S. Mid-Cap 450 Index, and the bogy's methodology limits the migration of stocks between market cap bands, which helps keep turnover and trading costs low. The index-tracking method also means that this fund has the highest concentration of mid-caps of the funds on this list. By definition, it holds the 301st to 750th largest U.S. stocks by market capitalization. Owning roughly 400 stocks provides volatility-taming diversification, and while actively managed funds aim to beat it, this fund truly sets the bar high with its razor-thin expense ratio. Patient investors have earned 10% annualized returns over the past 10 years, well ahead of the typical mid-cap blend fund's 7%.
Morningstar.com Premium Members can run this screen themselves by clicking here. Not a Premium Member? You can still run this screen by taking a free, 14-day Premium Membership trial. (Note that the results may change as funds come in or drop out of the screen over time.)
Karin Anderson does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.