Mid-Caps Attract Investors

Sat., Aug. 31, 1996

Associated Press

For investors who can’t decide between big stocks and small stocks, the mutual fund industry has a compromise to offer.

It’s the “mid-cap” fund, specializing in the shares of medium-sized companies - and one of the fastest growing of all fund categories.

The research firm of Lipper Analytical Services Inc. recently tallied 161 mid-cap stock funds, up from 115 and an increase of more than 40 percent in just the past nine months.

“The mid-cap arena seems compelling,” says Amy Arnott, editor of the Morningstar Mutual Funds advisory service in Chicago.

“Managers often tout the virtues of medium-size companies, noting that they’ve already made it through some of their toughest challenges but are still small enough to offer above-average growth prospects. Their record looks good too.”

By Morningstar’s measure, using the 50 largest funds in each category, medium-capitalization funds bested their larger- and smaller-cap rivals in the performance race over the past 10 years.

Mid-cap funds posted an average annual return of 11.99 percent, nosing out large-cap funds, up 11.78 percent, and micro-cap funds, up 11.45 percent, with giant-cap funds, up 10.39 percent, and small-cap funds, up 8.70 percent, further behind.

There are signs, however, that mid-cap stocks’ very popularity has caused them a few problems more recently.

The price-earnings ratio on a typical mid-cap portfolio lately ballooned to 27, Morningstar figures, putting it as much as 50 percent above the average for the market as a whole.

In the stock market selloff from early June through mid-July, the firm adds, the average mid-cap fund fell 11.70 percent - almost as big a drop as the average small-cap fund’s 12.08 percent loss, and a worse showing than those posted by the other three size categories.

“While it’s true that many medium-sized firms offer dynamic growth prospects, their growth is not unrecognized,” Arnott writes in a recent Morningstar commentary. “What’s more, such funds tend to have fairly large weightings in the volatile technology sector.”

Of course, there can be a wide variance in stock holdings between one mid-cap fund and another.

ILLUSTRATION: Graphic: FundWatch

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