Mind the gap
Key takeaways
Out of balance?
Many investors appear to be underexposed to mid-cap strategies in their equity allocations.
A potential "sweet spot"
Mid-sized companies are often described as a potential “sweet spot” of equity investing.
Take an active approach
Mid-cap stocks tend to have far less analyst coverage and fall under the radar, offering outperformance potential for active managers.
Refocusing on mid-caps: An often-overlooked segment of the US equity market
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 21% of US equity market cap1 but only 9% of US equity investor assets.2 Looking specifically at DC plan assets, the average participant allocation is only 7.1% 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, 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.
Growth, value or core?
To help keep things simple for participants, a single, carefully chosen mid-cap strategy may be sufficient for most plan menus.
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 19.07% compared to 13.17% for broad mid-caps.4 This isn’t surprising, given the types of industries that tend to make up growth sectors.
Weighing the active vs. passive debate
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 relative lower broad coverage could help offer greater outperformance potential through active management.
What to look for in strategy selection
- Proven outperformance across a wide range of markets
- Investment team tenure and stability
- Style consistency
- Strategy size and the potential for capacity constraints
Find out why adding a dedicated mid-cap allocation may help DC plan participants strengthen their retirement outcome potential.
Footnotes
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1
FactSet Research Systems Inc., as of December 31, 2024.
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2
Morningstar, as of December 31, 2024.
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3
Callan DC Index, as of September 30, 2024 (asset allocation of more than 100 large defined contribution plans representing approximately $400 billion in assets).
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4
Frank Russell Co., as of December 31, 2024. 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.
