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Portfolio > Economy & Markets > Stocks

Mid-Cap Value Funds Tap Rich Vein

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Mid-cap stocks enjoy the best of both worlds: They possess the strong liquidity and well-established businesses of large-cap companies, and the high growth potential and flexibility of small-cap stocks. Over the past few years, in a benevolent climate of historically low interest rates, the mid-cap value sector has flourished. For the five-year period through the end of September 2005, the average mid-cap value fund registered an average annualized return of nearly 10.0%, versus a 1.5% drop for the S&P 500.

One of the better long-term performers in this sector, the $1.1 billion RS Value Fund (RSVAX), is a relatively concentrated portfolio (53 holdings), with more than half of its assets invested in three industries: consumer discretionary, 27.3%; materials and processing, 13.9%; and health care, 11.4%. Lead manager Andy Pilara buys undervalued stocks–with a minimum market cap of $1 billion–using a methodology that combines balance- sheet and cash-flow analysis. Formerly called RS Contrarian Value, the fund currently has a cash position of 15.1%. In the past, it has kept as much as 25% of its assets in cash.

Another long-term top performer, the $4 billion Hotchkis and Wiley Mid-Cap Value Fund (HWMIX), seeks companies that appear to be undervalued relative to their tangible assets, sustainable cash flow, and potential for improving business performance. This fund will invest in stocks with market caps as low as $500 million (micro-cap territory), although the average market cap is $6.4 billion.

Like most value funds, Hotchkis has a heavy exposure to financial stocks (28.9%), making it the portfolio’s biggest individual sector. By comparison, RS Value has only 5.2% in financials. Hotchkis also has significant exposures to consumer discretionary (19.3%) and information technology (15.4%). With 64 holdings, the Hotchkis fund is currently closed to new investors.–Palash R. Ghosh


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