Feb. 17, 2004 — Mid-cap value stocks have outperformed all other domestic equity categories for the past ten years based on results for Standard & Poor’s domestic equity indexes.
Mid-cap value stocks benefit from less analyst coverage than large-cap stocks, and lower volatility than small-cap stocks, said Rosanne Pane, mutual fund strategist for Standard & Poor’s. She noted that growth stocks tend to attract speculative investors, which increases their volatility relative to value stocks.
According to managers of some of the best-performing mid-cap value funds for the past ten years ended in December, market inefficiences and investor psychology actually favor mid-cap value stocks.
Mid-cap value stocks often outperform due to lower valuations than the large-cap and growth market segments, said John Schneider, manager of PIMCO PEA Renaissance Fund/A (PQNAX). Schneider said a mid-cap focus is often beneficial because large-cap companies undergoing difficulties often fall to mid-cap status, creating buying opportunities.
PIMCO PEA Renaissance Fund, the best-performing mid-cap value fund for the ten years, gained by seeking beaten-down stocks with catalysts, and from investing in all market capitalizations, according to Schneider. Despite that flexibility, he said the fund has focused on mid-cap value stocks for most of the past ten years. Schneider has managed the portfolio for the last five years.
Edward von der Linde, manager of Lord Abbett Mid Cap Value Fund/A (LAVLX), agrees that mid-cap stocks offer opportunities for value investors since “large companies that tend to blow up come down into the mid-cap range.” Von der Linde also feels value investors gain from a greater focus on balance sheet metrics than growth investors, who focus on stock price growth, he says. Von der Linde became lead manager of the fund in October, 1995, after joining its team in 1988.
Ariel Appreciation Fund (CAAPX) also emphasizes company fundamentals rather than stock movements, said Tim Fidler, director of research for Ariel Capital Management. “We tell our analysts to be business analysts, not stock analysts,” he said. A value offering, Ariel Appreciation Fund focuses on mid- and small-cap stocks. “We don’t believe the market inefficiencies we are seeking to exploit are in large companies,” Fidler said.
– Bill Gerdes, Daniela Valle