We believe adding exposure to mid-cap value is a compelling investment strategy in many different economic environments. Mid-cap value equities have also been historically strong performers, and market conditions today might only enhance the potential opportunity they present.
Watch the video or read the recap below.
Mike: Hi everybody. Mike Corcoran with Institutional Investor. Thanks for joining us. We’re with Matt Fleming. Matt’s a portfolio manager for William Blair’s small- to mid-cap value equity strategies, and we’re going to be talking about some about those strategies today. And Matt, just writ large, why is exposure to midcap value an important thing for allocators?
Matt: Well, Mike, if you look historically, mid-cap value has been one of the best-performing asset classes. Over time, it’s been one of the best risk-adjusted returns. And then within that, you’ve had very few periods of time, if ever, when it’s been the worst-performing asset class compared to other indices, and several times has been the best performing. So we think overall, fundamentally, it’s a terrific place to invest.
Mid-cap value companies are small enough and nimble enough to effect change that can really create meaningful shareholder value.
And then just as importantly, we think it’s a terrific place to add value through active management. We think it shares a lot of the same characteristics as small-cap, where many of the companies are under followed from a sell-side research perspective. But we also think the companies are small enough and nimble enough to effect change that can really create meaningful shareholder value as well.
And then finally, we think it’s an under-allocated area where a lot of the large institutional investors have an underweight, which in turn allows us to add value through fundamental stock selection.
Mike: Matt, there’s a lot of stuff going on right now that investors are looking at. There’s low growth, rising rates, got some inflation (as everybody knows). Why mid-cap value now?
Matt: Well, Mike, we think it’s a terrific time to invest in mid-cap value right now. And a lot of those conditions that you just mentioned, we think make it very ripe for stock-picking success in a value strategy, particularly mid-cap value right now. If you look historically, value asset classes have tended to do well in rising rates for a number of reasons.
We think rising rates is the great equalizer of growth.
The first is that rising rates typically coincide with inflation or other economic growth. So if you think about it, it makes sense from a market perspective that if a rising tide is lifting all boats to not overpay for one or two companies or one or two sectors that are growing pretty quickly when you can get that across the board. So we think rising rates is the great equalizer of growth, if you will.
The second thing is that there’s historically always been a pretty big allocation within the value indices towards financial stocks, which have historically benefited from rising rates. So we think that’s another catalyst for growth.
And then we are very excited about the dispersion and the volatility that we’ve seen come back into the marketplace. So that does two things.
One is that makes our focus on value, and particularly on quality, shine. So a lot of companies that are not profitable, or are really perhaps financially over-leveraged, are going to struggle. So we think that really benefits the quality companies we seek.
And then the second is that again, it allows us to add value through stock selection.
Mike: When we come back and wrap up our conversation with Matt, we’re going to talk a little bit about how he finds an edge in that space and helps investors find an edge as well.
Matthew Fleming, CFA, is a portfolio manager and research analyst for William Blair’s small- to mid-cap value equity strategies.
GICS Reclassification: Impact on Emerging Market Investors
