Mid-cap stocks and mutual funds that invest in them have been on a roll so far this year, but the winning streak may be nearing an end.
Through October, stocks of medium-sized companies had performed better than those of small and large ones, as measured by gauges compiled by Standard & Poor’s. The S&P MidCap 400 index was up 5.6% during that span, while the S&P 500 and the SmallCap 600 indexes were up 1.1% and 3.1%.
Similarly, mid-cap funds topped all other fund categories through the first ten months of the year. Mid-cap blend funds gained 3.9%. Mid-cap growth funds climbed 3.6%, and mid-cap value funds rose 3.1%. By comparison, the average domestic equity fund returned 2%.
Investments in mid-cap funds increased to $36 billion last year, from $25.2 billion in 2003, and $14.9 billion a year earlier, according to Financial Research Corp. The funds had attracted $22.3 billion this year through September 30.
However, a number of market watchers think investors will begin moving into big companies some time next year if interest rates and inflation rise and the U.S. economy slows. In that kind of environment, investors will prefer the stability and maturity that large businesses can offer, they say.
Also, relatively small companies may be hurt by tightened monetary policy because they’re more apt to carry long-term debt, and therefore worse off if they need to borrow, said Kenneth Shea, director of global equity research at Standard & Poor’s.
“I think you’re going to see money rotating towards the S&P 500 and large-caps,” said Shea. “I think interest rates are going to be the biggest catalyst to get them there.”
In the same vein, Sam Stovall, chief investment strategist for Standard & Poor’s, said he does not think mid-caps are poised to outperform other stock categories much longer. “I think they must be in the eighth inning, or so, by now,” he said.
James Lloyd, senior analyst with The Leuthold Group LLC, which provides market research, expressed similar sentiments.
None of the three men had any firm explanation for why mid-caps have stayed ahead of stocks of larger and smaller companies lately.
Shea noted that investors have been embracing small and mid-caps over the last few years, indicating that they have been more willing to accept risk to gain higher returns. The rise of mid-caps may be a sign that people will still go out on a limb, but not as far as before, he said.