Video: The Case for Mid Caps
Alger Client Portfolio Manager Arthur Nowak, CFA, makes the case for mid caps and shares where we’re seeing opportunity today.
What’s the Short Term Case for Mid Caps?
ART NOWAK: I think, as everybody knows, the Magnificent Seven is over fifty percent in the Russell 1000 growth. And I think a good way to diversify away from that is through mid cap stocks. I think any you know style pure midcap manager won’t have any exposure to the Mag Seven or that concentration risk that we see in the large cap space.
In terms of valuations, I think if you look at mid caps you know over the last twenty years, midcaps have generally traded on par or at a slight premium to large caps. Right now, they’re trading at 25 to 30 percent discount to large caps. So, we think there’s a little bit of a coiled spring in the short term for mid cap stocks.
And in the Long Term?
ART: I think long term, if you look at mid caps, over the last 30 years against both large and small, many people wouldn’t expect this, but mid caps actually outperform both. And they’re doing so with much less standard deviation and beta and better Sharpe ratios than you see in the small cap space. And if you look at the average large cap stock, there’s somewhere around twenty to twenty five analysts covering those individual stocks. If you look at the average mid cap stocks, you’re looking at low teens in terms of the analysts covering it.
We really do think that mid caps are in a sweet spot between large caps and smalls. You know I think they have that growth profile that you see in the small cap space. You see companies with better balance sheets, healthier access to capital markets, more diversified product lineups.
What Kind of Opportunities Are You Seeing in Mid Caps, Right Now?
ART: In 2022, interest rates rose at a pace and magnitude that we haven’t seen in over 40 years. And we’ve seen over the last couple of years that companies are staying private much longer. So, what’s happening is that because companies are staying private longer, they’re growing and they’re actually IPO’ing when they’re basically mid cap stocks. And obviously, we believe that lends to more opportunities for mid cap managers to invest kind of in the ground floor of these companies.
For Investors Concerned About an AI Bubble, What Do Mid Caps Provide?
ART: One of the biggest things that people are concerned about are these hyperscalers putting hundreds of billions of dollars in capex into the ground in order to build out AI, and they’re concerned about the returns. When we look down market cap, we’re really looking at more of the adopters. They don’t have a team of data scientists building out large language models and engineers. They’re simply going to be companies that are going to be adopting AI into their business model to make them more efficient or make better products. So, I think that it’s a little more insulated than a lot of the names that you hear about on CNBC and Yahoo Finance.
Why Might Investors Interested in Mid Caps Consider Alger?
ART: We have a mid cap ETF, we have two mid cap growth mutual funds, different flavors of investing. I think after 2022, mid cap investing has come back, but not as much as large cap. And we still think there’s a lot of opportunity for our portfolio managers to continue to outperform in the midcap space. I think we have two very seasoned investment professionals that run our midcaps and, again, you know, different styles.
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