Opportunities in the middle ground

Columbia Management, Investment Team | July 2, 2013

  • Investors seeking growth opportunities for an equity portfolio should not overlook mid-cap stocks.
  • Mid-size companies typically feature a combination of desirable attributes – more stable than start-ups yet more flexible than large companies.
  • Investors holding mid-cap stocks over long periods have benefited from strong performance with less volatility compared to small-cap stocks.

Finding the middle ground usually means making compromises. But when it comes to investing in stocks, the middle ground – that is, mid-cap stocks — presents an appealing opportunity.

Traditionally, investors seeking long-term growth in the stock market have trusted their assets to large, established companies that have historically offered strong growth over the long term. And some look to small-company stocks, which offer the potential for even more growth over time, though with increased short-term volatility. But the medium-sized companies in between – generally in the $2 billion and $10 billion capitalization range — are often overlooked by investors.

Mid-cap companies have made it past the less stable start-up period, but are not yet fully mature. And while they may not yet be the established powerhouses of the S&P 500, they are typically growing faster and have the greater flexibility of smaller, leaner organizations. Historically, mid-cap stocks have produced compelling relative returns. Over the 10-year period ended 5/31/13, mid-cap stocks outperformed both large-cap and small-cap stocks. What’s more, this outperformance came with less volatility compared to small-cap stocks. (See chart, below.)

Equity investors seeking to build a diversified portfolio should consider the opportunities in this “middle ground.”

MidCap stocks

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Investments in mid-capitalization companies involve greater risks and potential volatility than investments in larger, more established companies.