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.