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Portfolio > Mutual Funds

Mid-Cap Value Funds Deliver Outsized Performance: Mutual Fund Focus, August 2010

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News and analysis from Standard & Poor’s MarketScope Advisor

Mid-cap stocks seem to suffer from a perennial identity crisis. One the one hand, they are too small to command the dominant positions in large, lucrative markets that large-cap companies typically enjoy, yet they are too big to offer the enormous potential of the young startup. Few investors even agree on what mid-cap stocks are: the Standard & Poor’s MidCap 400 index includes companies with capitalizations between $750 million and $3.3 billion, though many mid-cap funds buy companies with capitalizations of $15 billion or more.

One fact about mid caps, however, is clear: as measured by the Standard & Poor’s MidCap 400, they have outperformed the large-cap S&P 500 and the S&P SmallCap 600 during the first six months of 2010 and calendar 2009. Mid caps are up over the five years to Aug 12, 2010, while both large and small caps are down, and mid caps have beaten large caps over the past 10- and 15-year periods as well. Mid caps have also beaten small caps over the 15-year period, but fell short of small caps over the 10 year period.

Looking forward, S&P equity analysts expect stocks in the S&P MidCap 400 to deliver a 58% average earnings increase for 2010, vs. an expectation of only 46% for the S&P 500 constituents.

Which Should You Consider?

For those intrigued by the strong performance mid-cap stocks have delivered, there are hundreds of mid-cap mutual funds available, and with chatter getting louder about a possible “double dip” recession in the future, it makes sense to look at the value side.

There are slightly fewer than 100 unique mid-cap value funds that are open to new investors and are not targeted to institutions. Of these about one third charge an upfront sales load, which varies between 5.75% and 3%. The largest of these funds has more than $7 billion in assets. Annual expense ratios run from a low of 0.52% to as much as 2.47%. Over the past five years, these funds have delivered average annual returns ranging from 4.95% to -11.27%. In order to single out the most attractive funds, we looked for funds with no upfront sales load, more than $20 million in assets, a four- or five-star ranking from S&P, and a combination of strong long-term performance and low cost.

The Appleseed Fund (APPLX), managed by Chicago-based Pekin Singer Strauss Asset Management, has delivered an impressive 4.95% average annual return over the past three years, one of only two mid-cap value funds in the black over that period. Opened in December, 2006, the fund looks for classic value traits like high quality companies selling at discounted prices, but it also seeks “sustainable companies that balance the generation of profits with an awareness of their impact on the environment and society.” Among its top 10 holdings, which account for almost 60% of the funds assets, are: John B. Sanfilipo & Sons, an Illinois-based grower and processor of nuts; New York-based Willis Group, a global insurance broker; and Pico Holdings, a diversified owner of water resources, insurance and real estate operations among others.

Another consistently strong performer meeting the criteria is the Delafield Fund (DEFIX), run by New York-based Toqueville Securities. In business since 1993, the fund gathered $775 million in assets using a “conservative investment posture” that is “driven by bottom up value/special situation analysis.” It boasts the second best performance among mid-cap value funds over the past five years, a 5.21% average annual return, and places in the top five for three-year returns, all while charging a below average annual expense ratio. The top three holdings for the fund as of June 30, 2010 were Flextronics, Checkpoint Systems, and Stanley Black and Decker.

American Century’s Mid Cap Value Fund (ACMVX), with about $560 million in assets, owns the fifth best five-year performance record among mid-cap value funds, delivering an average annual return of 3.86% over that time, and places in the top 10 for three-year performance as well. It charges the lowest annual expense ratio of the three chosen funds and is one of the least expensive of the mid-cap value fund group over all. Among its top 10 holdings, which account for about 24% of the fund’s assets, the three largest were Phoenix-based waste hauler Republic Services, Chicago-based financial services firm Northern Trust, and Canadian integrated oil company Imperial Oil.


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