The FTSE 250 has significantly beaten the FTSE 100 in the short, medium and long-term. In the last 12 months, the mid cap index is up 22.45 per cent – around twice as much as the All Share.
Unsurprisingly, mid cap funds such as Haines’ Threadneedle UK Mid 250 portfolio are among the top performers in the UK All Companies sector over the period.
Performance of fund vs indices over 1yr
Source: FE Analytics
In spite of mid caps’ excellent run, Haines says they are just as attractive as they were a year ago from a valuation perspective.
“If you look at discrete calendar year performance, you see that the FTSE 250 outperforms [the FTSE 100] during the steady growth years, and in racier markets like 2009 and 2012 they dramatically outperform,” he said.
“You’ve had the best part of 20 per cent outperformance in 2012, which would lead many people to think that they are surely expensive.”
“However, if you look at the P/E [price to earnings] premium that they are on versus the FTSE 100, mid caps haven’t re-rated at all in spite of their outperformance.”
“They’re still on a premium, which is typical of the last decade or so, but the point is that this premium is not out of kilter with what it’s been in the last 10 to 12 years.”
Haines says he does not expect a double-dip recession and is generally positive about equities. In this environment, and with valuations at reasonable levels, he thinks mid caps will continue to outperform larger caps.
“We’re growing at a lower level, which favours mid cap exposure,” he said. “The fund is relatively balanced at the moment, and would only become significantly more cautious if we see poorer data coming out of the US.”
“I think mid caps will definitely deliver double-digit returns this year, though 30 per cent like last year might be a bit of a stretch.”
Haines says he buys into the “great rotation” argument and thinks it is already under way.
“It makes sense, in that equities are the asset class for returns. Bonds are fiendishly expensive,” said the manager.
“This backs up the idea that there should be a big switch, and what we’ve seen this year suggests we may have already seen that.”
“If we see some political clarity towards the end of the year, and 2014 earnings estimates are good, we could see some upgrades in P/E ratios. It could be a spicy second half of the year,” he added.
Haines aims to beat both his FTSE 250 (ex ITs) benchmark, and be a consistent top quartile performer in the UK All Companies sector.
Threadneedle UK Mid 250 is top quartile over one, three and five years and since its launch in September 2003. Over this period, it has returned 219.66 per cent.
Performance of fund vs sector and index since launch
Source: FE Analytics
It has slightly underperformed its benchmark over the period, but with significantly less volatility.
Haines says his style means he tends to outperform during market falls, but underperform during steep rallies. This is illustrated by his superior performance in 2008 – when he lost 8 percentage points less than his benchmark – and underperformance in 2009 – when the fund gained 14 percentage points less than the index.
“Mid caps have the scope to offer transformational scope,” he said. “We try and find companies that can do this, while also being high in quality.”
“We do this through in-depth company analysis, looking at profit and loss, cash-flow, balance sheets and so on. Of those that tick these boxes, we then try and find the stocks that have the potential to grow their market share and that have scope for a re-rating.”
While Haines is a stock picker, he changes his focus on specific themes in the portfolio depending on his macro outlook.
He says he will increase his exposure to cyclical and structural growth stories – such as Croda or AZ Electronic Materials – when he is more positive. However, when he is more negative he switches the theme of the portfolio into what he refers to as “all weather” stocks, such as Babcock.
This, he says, has led the fund to strong returns on a risk-adjusted basis.
“If you look at last year we were slightly above the benchmark, but if you look at risk-adjusted returns we were right up there,” he said.
“Our higher quality bias means we tend to do better when the market falls. I’d expect the biggest bulk of our outperformance to happen when the market falls,” he added.
Haines has a flexible mandate, which allows him to hold up to 20 per cent outside the FTSE 250 index. He currently has 15 per cent in FTSE 100 companies, for example.
“If it’s still unvalued and growing, and has moved from the FTSE 250 up to the FTSE 100, would you sell it?” he asked. “I still hold Croder, for example.”
He says a big advantage of being a mid cap manager is that the benchmark is not as concentrated as the FTSE 100, which is dominated by a handful of multi-nationals.
“The biggest stocks on the index have a 1.5 per cent share, which means you don’t have to own it if you don’t like it,” he explained.
“For this reason, traditionally it’s looked upon as a stockpicker’s market.”
The £113m Threadneedle UK Mid 250 fund requires a minimum investment of £2,000 and has a total expense ratio (TER) of 1.65 per cent.
Haines says he would not have any problem running the same strategy until the fund size surpassed at least £500m.