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Are funds focused on the US mid-cap space worth considering?

With the US large cap space notoriously difficult for active managers to outperform in, FE Trustnet explores the mid-cap space.

Rob Langston

By Rob Langston, News editor, FE Trustnet
Friday July 14, 2017

US mid-caps could be an interesting proposition for investors looking to drive outperformance from active management in American markets, according to the latest FE Trustnet study.

Much of the recent conversation about US market performance has centred on the blue-chip stocks of the S&P 500, in particular the huge technology names.

Indeed, many advisers and analysts have argued that it remains difficult for UK investors to derive significant returns from an active fund in the US large-cap space as it is so well covered and subject to large passive inflows.

Yet despite the medium-term outperformance of the market seen over the last decade, since the election of Donald Trump as president in November last year, the S&P 500 index has risen by 9.95 per cent, lagging global markets more recently as growth has slowed.

Performance of S&P 500 vs MSCI World since US presidential election

Source: FE Analytics

While US markets initially climbed higher as a result of Trump’s pro-growth campaign, momentum has slowed somewhat as the new president has faced increasing challenges in passing new legislation, giving investors cause for thought on whether the large-cap passive vehicles that have outperformed over recent years will continue to do so.

The IHS Markit US Composite PMI Output Index rose to 53.9 in June, up from 53.6 in the previous month and the research house noted that the rate of growth remained “historically muted”.

Yet, the economy looks set “to expand at a moderate pace over the next few years”, according to Federal Reserve chair Janet Yellen, giving the central bank confidence to raise interest rates further.

The US large cap index has performed strongly over the medium-term thanks to more bullish sentiment and the strong performance of the technology sector, over the long term, stocks at the smaller end of the market cap scale have performed best and could present an interesting opportunity if the loose monetary policy enjoyed by markets begins to unwind.


Over 10 years, the MSCI USA Small Cap index is the best performer rising by 218.85 per cent while over five years the MSCI USA Mid Cap index emerges at the top with a 138.11 per cent gain.

As such, FE Trustnet compiled a bespoke sector of funds focused on the US mid cap space, either as their main focus or as part of a smaller companies strategy, as defined by FE Analytics.

Those funds include: Brown Advisory US Mid-Cap Growth, Hermes US SMID Equity, JOHCM US Small Mid Cap Equity, Jupiter US Small and Mid Cap Equity, Neptune US Mid Cap, Schroder US Mid Cap, and T.Rowe Price US Smaller Companies Equity.

Over the first half, US mid-cap funds typically underperformed their large cap peers in the IA North America sector with mixed results against the IA North American Smaller Companies sector average.

As the below chart shows, FE Trustnet’s IA US Mid Cap sector was up by 0.67 per cent, compared with a gain of 3.78 per cent for the average IA North America fund and 0.63 per cent for the IA North American Smaller Companies sector.

Performance of sectors over H1

Source: FE Analytics

However, over three years the sector comes into its own. Four of the seven funds in the custom sector have a three-year track record, three of which have outperformed the Investment Association’s North American sector averages.

The best performer over three years is the £2bn Schroder US Mid Cap fund, with a return of 80.19 per cent.

The five crown-rated fund is overseen by FE Alpha Manager Jenny Jones. It aims to invest at least 70 per cent of the portfolio in shares of medium-sized North American companies. Companies invested by the fund will be located in the bottom 40 per cent by size of the North American market at the time of purchase.


Performance of fund vs benchmark over 3yrs

Source: FE Analytics

“The fund’s mid cap remit means that it will have a strong dependency on the health of the US economy: most of the small- to mid-sized companies will be domestically focused,” noted the FE Invest team.

“The rebounding US economy has been a strong driver of returns after the global financial crisis; however, should sentiment deteriorate, this pattern could reverse.

“The allocation to stable companies should help offset some of the losses in a falling market, but it means the fund will not keep up in a strong market rally.”

Other notable three-year performers include the T.Rowe Price US Smaller Companies Equity fund, which is up by 75.82 per cent, and the Hermes US SMID Equity fund’s 71.19 per cent return.

The Schroders fund is also a top performer over five years. The fund is up by 147 per cent, closely followed by while the T.Rowe Price offering, which has risen by 145.25 per cent. For comparison, the average IA North American Smaller Companies fund is up by 126.97 per cent while the IA North American sector average is 12.62 per cent over the same period.

Over 10 years the T.Rowe Price offering is the best performer. The four FE Crown-rated fund, which has been managed by Ryan Burgess since the end of last year, and has returned 261.6 per cent over the past decade. The fund invests mainly in a widely diversified portfolio of stocks from smaller capitalisation US companies.


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Data provided by FE. Care has been taken to ensure that the information is correct, but FE neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.

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