Our analysis found that more than two-thirds of the time (over a 34-year period), mid-cap equities outperformed large- and small-cap stocks over the following year when GDP grew at less than a 3.5% annual rate. Those comparatively slow GDP growth environments occurred in 22 of the 34 years. As you can see in the chart below, the average excess return of mid-cap shares over large-company stocks was close to 4.5%. Mid-cap equities finished just slightly ahead of small-caps on average in such periods.
We believe that mid-cap equities have a long-term, strategic role to play in investor portfolios—the attractive risk-adjusted return profile of stocks in this capitalization range mean they deserve a place in a diversified portfolio. What’s more, our analysis suggests that those whose outlook is for slow economic growth should consider that historically, mid-cap equities have outperformed in such periods.
- Exposure to mid-cap companies remains subdued, despite attractive fundamentals and performance.
- Mid-caps are companies with market capitalizations of between $1 billion and $20 billion (price per share times number of shares outstanding).
- Small-cap companies tend to be less established and more volatile than mid-cap companies; large-cap companies are more mature and generally have a lower growth potential than mid-caps.
- Mid-caps have provided more attractive long-term risk-adjusted returns, a trend that we see continuing going forward.
For investors with a specific view on economic growth, it may make sense to consider implementing or increasing an existing mid-cap allocation, consistent with existing risk tolerances and investment objectives. Individual Investors | U.S. Investment Professionals
Download a PDF of this post.
Russell Top 200® Index
Measures the performance of the 200 largest securities of the 3,000 publicly traded U.S. companies in the Russell 3000® Index, based on total market capitalization. It is not an investment product available for purchase.
Russell Midcap® Index
Measures the performance of the 800 smallest of the 1,000 largest publicly traded U.S. companies, based on total market capitalization.
Russell 2000® Index
Market-capitalization weighted index created by Frank Russell Company to measure the performance of the 2,000 smallest of the 3,000 largest publicly traded U.S. companies, based on total market capitalization.
Historically, small- and mid-cap stocks have been more volatile than the stock of larger, more established companies.
The opinions expressed are those of our investment professionals, and are no guarantee of the future performance of any American Century Investments portfolio. This information is not intended to serve as investment advice; it is for educational purposes only.