It is 65 degrees and a beautiful weekday afternoon. I have just returned from a two-hour ride on my favorite horse and I am sitting on my back porch watching geese circle the lake.
The screened porch is wonderful but too small. My builder says I can double the size but I would have to have two posts in the middle. These posts would be needed to hold up the larger roof.
At the beginning of the year I added a midcap index fund to the three model portfolios we track in this column. It was a good move that helped performance. In a way the midcap funds were like the posts on the back porch - they look expendable but they were responsible for "holding up the middle" during the first quarter.
Midcap funds specialize in stocks with a market capitalization that falls in a range from about $1 billion to $10 billion. The Standard & Poor's Mid-Cap Index consists of 400 companies in this range. Stocks with market caps of more than $10 billion are represented by the S&P 500 index. Those under $1 billion are represented by the S&P 600 or Russell 2000 small-cap indexes.
Midcap stocks are not as widely followed by analysts as the 500 large-cap names that are so familiar to most investors. This can make it easier for fund managers to find overlooked gems. The midcap sector can also include companies that have stronger growth or more potential to be acquired than large-cap companies. Compared to the volatile small-cap sector, midcap companies usually have larger, more established businesses and better access to resources.
Small wonder then that the midcap sector is the hunting ground of some of the best, but sometimes overlooked, fund managers. Here are a few of my favorites that are open to new investors.
Berger Mid-Cap Value Fund:
Begun in 1998, this midcap fund is run by the same manager as the successful, but closed, Berger Small-Cap fund. Its three-year annual return is 26.2 percent, and the fund is up 5.5 percent this year.
Longleaf Partners Value Fund:
This favorite is up 11.1 percent annually over the past three years and is up 7.1 percent this year. If your goal is to make a fairly consistent average 10 percent return, Longleaf has consistently delivered by using a true Graham & Dodd value investing process.
Weitz Partners Value Fund:
Weitz Partners and sister fund, Weitz Value, always seem to come through. While performance has lagged other funds recently, due to the manager's focus on media stocks, Weitz Partners has returned 10.5 percent annually for three years and 21.1 percent annually for the past 10 years.
Meridian Value Fund:
With an average annual total return of nearly 30 percent for the last three years and 26 percent annually for five years, you can see why this fund is currently ranked in the top 1 percent of the midcap blend category. However, these past successes have brought this fund to the attention of many new investors. My only concern is the dramatic growth of assets will be a drag on performance.
Vanguard Capital Opportunity Fund:
The minimum investment is steep at $25,000, but you can't argue with the performance. The management team leading this fund had built up a large weighting in airline stocks when Sept. 11 happened. Those events have hampered both the airline industry and this fund since. However, the annual return for the past three years has still been 24.6 percent, and for five years is 22.6 percent. I have no doubt the team is working to get this fund back in the air.
Vanguard Mid-Cap Index Fund:
If you are an index fund investor, check out the Vanguard Mid-Cap Index fund. It has returned 15.4 percent annually for the past three years and is up 6.2 percent in the first quarter this year. An exchange-traded fund is also available in the AMEX Mid-Cap S&P 400 Spider.
I plan to leave the midcap index fund as a permanent part of the model portfolios. Likewise, the two supporting posts will have to remain permanent if I expand my back porch.
(Frank A. Jones, investment adviser and a former director of the Eighth District Federal Reserve Bank, writes about mutual funds at The Commercial Appeal in Memphis, Tenn. E-mail email@example.com)
© 2018. All Rights Reserved. | Contact Us