Mid-cap equities offer a compelling yet often overlooked opportunity for defined contribution (DC) plans.
Yet many participants — particularly core menu investors — appear to be missing out on the opportunity to include mid-cap strategies in their equity allocations.
Consider that mid-caps make up 24% of US equity market cap1 but only 11% of US equity investor assets.2 Looking specifically at DC plan assets, the average participant allocation is only 8.7% across small- and mid-cap strategies combined.3 Since many participants are underexposed to mid-cap stocks, they may be missing out on this potentially attractive area of the market.
Mid-sized companies are often described as a potential “sweet spot” of equity investing that combine some of the best features of large- and small-cap stocks.
With that in mind, here are some reasons that plan sponsors and their advisors may want to reconsider their mid-cap offerings to help expand on the full potential offered by the asset class.
To help keep things simple for participants, a single, carefully chosen mid-cap strategy may be sufficient for most plan menus. However, growth securities in the mid-cap segment have been particularly rewarding, compounding much faster in earnings growth rates compared to the broader mid-cap market. For example, earnings per share growth over the past five years for the mid-cap growth segment was 20.29% compared to 12.78% for broad mid-caps.4
Historically, the mid-cap market has been less efficient than the large-cap market because these stocks usually have far less average industry analyst coverage and often fall under the radar. This relatively lower broad coverage could help offer greater outperformance potential through active management.
Find out why adding a dedicated mid-cap allocation may help DC plan participants strengthen their retirement outcome potential.
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FactSet Research Systems Inc., as of December 31, 2021. The Russell Midcap Index = 24% of the Russell 3000® Index.
Morningstar, as of December 31, 2021. Morningstar US Mid-Cap categories = 11% of all Morningstar US equity assets.
Callan DC Index, as of December 31, 2021 (asset allocation of more than 100 large defined contribution plans representing approximately $350 billion in assets).
Frank Russell Co., as of March 31, 2022. Mid-caps represented by Russell Midcap Index and Mid-cap growth represented by Russell Midcap Growth Index. Past performance does not guarantee future results. An investment cannot be made into an index.
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These articles were prepared for US investors and may contain information that may be materially different for Canadian investors, particularly with respect to taxation matters and after-tax returns. These differences may affect suitability for Canadian investors, and these materials should not be relied upon by Canadians in making any investment decisions. This material is provided to you for informational purposes only and may not be distributed or shared with others. The information provided is general in nature and may not be relied upon nor considered to be the rendering of tax, legal, accounting or professional advice. Readers should consult with their own accountants, lawyers and/or other professionals for advice on their specific circumstances before taking any action. All figures in USD unless otherwise stated.
The opinions expressed are those of the authors, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.
The Russell Midcap Index measures the performance of the mid-cap segment of the US equity universe. The Russell 1000® Index measures the performance of the large-cap segment of the US equity universe. The Russell 2000® Index measures the performance of the small-cap segment of the US equity universe. The Russell Midcap Growth Index measures the performance of the mid-cap growth segment of the US equity universe. The Russell 3000® Index measures the performance of the largest 3,000 US companies, representing approximately 98% of the investable US equity market. An investment cannot be made into an index. The Russell Indexes are trademarks/service marks of the Frank Russell Co. Russell® is a trademark of the Frank Russell Co.
As with any comparison, investors should be aware of the material differences between active and passive strategies. Unlike passive strategies, active strategies have the ability to react to market changes and the potential to outperform a stated benchmark. Other differences include, but are not limited to, expenses, management style and liquidity. Investors should consult their financial professional before investing.
Stocks of medium-sized companies tend to be more vulnerable to adverse developments, may be more volatile, and may be illiquid or restricted as to resale.
Growth investing generally seeks stocks that offer the potential for greater-than- average earnings growth and may entail greater risk than value investing. Growth stocks tend to be more sensitive to changes in their earnings and can be more volatile.
Earnings-Per-Share (EPS) refers to a company’s total earnings divided by the number of outstanding shares. performance.
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