Mid Cap Equity Mutual Funds
The S&P 400 MidCap Index is the Index We Use To track MidCap Equity Funds
Unlike its large cap funds counterpart, mid cap equity mutual funds focus on a different breed of equities. In some ways, these equity investment funds have a little more flexibility when it comes to active portfolio construction because the average security size will fall somewhere between $2 Billion and $10 Billion. When looking at the science and mathematics behind the word “average,” we immediately see that MidCap Equity Funds can therefore use a barbell approach to portfolio construction and still fit within this classification.
In its simplest form, a Barbell Strategy involves investing in small cap securities as well as large cap securities without actually holding any mid cap stock. When taking the average value of the security holdings, the end result will place the equity investment fund as a “Mid Cap Equity Fund” even though this particular mutual fund may not hold any mid cap securities at all.
Luckily, at the Mutual Fund Site, we do not review many actively managed mid cap equity funds. However, in an effort to keep away from classifying a strategic fund incorrectly as a Mid Cap Equity Fund, we review the Top 100 holdings and make sure that least 50% of the equity holdings are indeed true mid cap stocks. As for the rest, it is completely up to the fund manager how those assets are managed; we are happy if half of the Top 100 are true mid cap equities.
Aside from classification, mid cap equity funds provide investors with an attractive opportunity. Not only can more aggressive or opportunistic capitalization classes be easily and almost invisibly integrated into the investment fund’s portfolio, but mid cap securities themselves off the best of both worlds. While they are not small cap securities, they often encompass the aggressive and innovative nature of small cap stocks while at the same time the same managerial edge of large cap equities. This makes for an interesting combination.
In addition, in periods following a market correction, some large cap securities may become mid cap securities, allowing mid cap investment funds to pick up large cap stock for a decent discount.
In 2010, mid cap equities performed in the middle of the pack compared to their small cap and large cap counterparts. In this regard, it made for a fairly conservative investment for many investors. However, for risk averse individuals who are looking to test the waters of risk and step outside the comfort zone offered by large cap equity funds, a mid cap mutual fund would be the more prudent approach (compared to a high flying small cap fund).
We see mid cap equity funds as encompassing greater risk than large cap equity funds, but less risk than small cap equity funds. But equally important to consider is the investment style of the mutual fund’s overall portfolio.
Other Market Capitalization Categories To Consider