Finding The Middle Ground

A fair number of market experts will tell you that middle-sized companies offer a unique opportunity under most market conditions. For one, they often go under-appreciated by large brokerage firms until they report dazzling profit news. This means that a well-run mid-cap is often poised for the same potential for large gains that investors find in small companies. Additionally, mid-caps tend to be more established than small-caps, and therefore less likely to undergo extreme volatility when the market drops.

Compare this year’s results with numbers tainted by the bear market. As of the end of the third quarter 2003, large corporations tracked by the S&P 500 Index had averaged a 14.7% gain. The S&P SmallCap Index logged a 20.9% gain over the same nine months, and the S&P MidCap benchmark wasn’t far behind with a 19.8% tally. Over the last three years through Oct. 6, including the bear market, large-cap shares retreated an average 9.46% annually, mid-caps slid 6.49%, and small-caps averaged an annual gain of 1.35%.

As you look at opportunities for this year, you may want to hedge your bets with a mid-cap blend fund, a category that the mutual fund research company Morningstar says incorporates a mix of growth and value investing styles. As of Oct. 10, 2003, mid-cap blends were up 26%, thanks in part to a strong rally by technology stocks. Morningstar analyst Dan McNeela says, “Coming into a rally, smaller-cap stocks tend to do well. But the best reason to get interested in [mid-cap blend funds], however, is [because it’s] a way to diversify a large-cap-heavy portfolio.”

We screened Morningstar’s database looking for portfolios with the strongest record over the last three years, an indication of how well a fund can perform under rough market conditions. The fund that finished atop our list was the Hussman Strategic Growth Fund, which provided investors a 19.7% average annual return over the three-year period ending Oct. 6, 2003. The fund’s management often applies hedge-fund strategies to investing and have taken sizeable stakes in healthcare and consumer companies. As of this writing, the Hussman fund carried a five-star rating from Morningstar, but the portfolio’s expense ratio was a high 1.99%, and its turnover rate was 199%.

The Ariel Appreciation Fund also makes our list. Managed by John Rogers, the Ariel fund boasts a five-star ranking and has had a 12.2% average annual total return over the last three years. Over time, Rogers has aimed to snatch up stocks selling at 40% or more to his calculation of their company’s value. His portfolio tends to stock up on financial and consumer companies while carrying a light weighting in technology shares. The Ariel fund posted an impressive 22.4% return for the first nine months of 2003. The fund has a 13% turnover rate and an expense ratio of 1.26%.