The mid cap companies space
Often described as the "sweet spot" of equity investing, the mid-cap segment has unique characteristics that are often overlooked and underappreciated.
A mid-cap company is defined as having a market capitalisation ranging from USD$2 billion to USD$10 billion. Mid-caps tend to balance the spirit of a small company with the maturity of a larger company. Most of the time, they're established companies in the process of expanding in industries where rapid growth is predicted.
Interestingly, this segment has delivered the best risk-adjusted returns over one, five, ten, and twenty years, outperforming all other size categories. So why don't we hear about mid-caps more often?
5 interesting facts about global mid-cap companies
Global mid-cap companies are often overlooked because they're lumped together with small-cap companies for investment purposes, diluting their unique differences.
Due to their size, mid-caps often experience higher revenue and net income growth than large-caps and can respond quickly to growth opportunities.
Mergers and acquisitions tend to happen at the mid-cap stage of a company's life cycle, resulting in a growing market share without the heavy lifting - often eliminating competition along the way.
Mid-cap funds can easily outperform large caps during bullish market conditions because investments are concentrated in stable companies with robust business plans.
Mid-caps tend to reinvest more capital in their business than large caps.
What to look for in a mid-cap company
Mid-sized companies have done the hard yards and survived the high risk, small-cap stage of company growth. However, if you're thinking of investing in a mid-cap, a focus on the quality of a company is always important. That's why we prefer managers with a strong emphasis on the following:
A solid balance sheet
Ongoing increasing revenue
Good brands
A visionary leader with a quality management team
Participation in an industry experiencing sustainable growth
An excellent track record of taking care of investors
Mid-cap companies add diversification.
For a mid-cap fund to be successful, it must reduce risk through a good mix of investments across countries, continents, sectors and industries. Some fund managers concentrate investments in mid-cap companies, holding a small number of stocks in which they have high conviction. Others are broad in their approach, holding a larger number of stocks and diversifying funds across countries such as the US, the UK and Canada, regions such as Europe and Eastern Europe, and continents including Asia and Australia.
Mid-caps include a broad mix of technology players, healthcare shares, consumer discretionary companies and more.
Here are a few Australian mid-cap companies you’ve probably heard of:
Bapcor Ltd
Bapcor operates retail and service businesses specialising in car parts. Their brands include Australia’s premium retail offering Autobarn, independents Autopro, Sprint Auto Parts, Opposite Lock and Car Parts, and service businesses Midas, ABS, Shock Shop, Battery Town, and Burson Auto Parts.
Bega Cheese
You may have seen their extensive range of cheese products on supermarket shelves.
Tassal
A well-known, large-scale aquatic salmon and prawn farming operation based in Tasmania.
Webjet
This online travel business has been affected by the pandemic, but it’s expected to bounce back as soon as the economic recovery is in full swing.
The global mid-cap companies' opportunity
You'll often find that investors opt for large-cap stocks because of the familiarity of big names and industries and the associated perception of lower risk. Investing in mid-cap companies can be a bumpier ride than investing in larger companies. On the flip side, they combine the positive qualities of large and small caps.
Often seen as the 'blue chip' companies of the future, mid-caps may have more room to grow than their larger cousins. The outcome of being at this stage of company growth is that they maintain lower volatility and have a far lower risk of failing than small caps.
It's rewarding to invest in mid-caps during their growth phase and to watch the share price grow. That's why we always look to include these companies in our investment portfolios. Nonetheless, we will always take our time to research a suitable manager before determining an appropriate allocation. And we carefully monitor performance as part of our ongoing review process.
Rest assured, it's our ongoing commitment to you to focus on achieving the aims of each portfolio with your investment return in mind.