“Large-cap stocks offer the stability that comes with mature multinational businesses with diverse revenue sources,” Bartolini said. “Small-cap stocks are unproven, but they offer potential for further expansion and market penetration. And midcaps offer a unique combination of the managerial maturity associated with large caps and the operational dexterity of small caps.”
That’s not just a hypothesis. Bartolini notes that midcap companies have historically had lower leverage than large caps, while enjoying margins that are in between large- and small-cap companies. Over the past two decades, they’ve had a 7% higher growth rate than large caps, and 32% less earnings volatility than small ones.
Meanwhile, ETFs that track indexes are increasingly being used as investing strategies in and of themselves, and many investors are looking at size as a factor in allocating funds, points out Todd Rosenbluth, head of fund research at CFRA.
More money is allocated to large-cap strategies — $6.7 trillion — and small caps — $825 billion — than midcaps, which has only captured $872 billion, Bartolini noted. And Rosenbluth has a tally of mutual funds: only 289 focused on midcaps, compared with 525 focused on small caps and 784 on large.
That may be because the investment thesis for large- and small-cap strategies is more obvious, but it may also be because active midcap managers have underperformed.
Less than one-third of active midcap managers have beaten their benchmark over multiple time horizons, Bartolini wrote. While he doesn’t explain why, he does note that there are twice as many Wall Street analysts covering large-cap stocks as covering midcaps, and a survey of academic literature reveals six times as many research papers written about “small cap” or “small stocks” compared to “mid cap” or “mid cap stocks.”
Whatever the reason, the track record of active managers, and their higher fees — about 98 basis points compared to less than half that for index-fund fees — make a passive approach more appealing, Bartolini wrote.