With the banks out of favour with investors at the moment – not only because of the proposed Government bank levy – and small-cap stocks continuing to lag, the mid-cap sector is attracting renewed interest.
John Welling, associate director of equity indices at S&P Dow Jones Indices, analysed the performance differences between Australian market cap segments and observed that mid caps offer a “sweet spot” for market participants.
The year-to-date numbers are: S&P/ASX Mid-Cap 50 Index, 10.1 per cent; S&P/ASX 50 (large caps), 2.6 per cent; S&P/ASX Small Ordinaries, 1.2 per cent; and S&P/ASX 200 (broad market), 3.4 per cent.
Perhaps surprisingly, the mid-cap sector offers a more diverse representation of industry sectors than either the large-caps, which are dominated by the banks and big miners, or the small-cap and micro-cap end of the market.
The Mid-Cap 50 Index is made up of stocks between 51 and 100 within the S&P/ASX 100 – that is, not in the top 50. The index provides a benchmark for large active managers where the emphasis is on having a portfolio with sufficient liquidity.
Welling says, apart from not including the big banks, the Mid-Cap 50 has higher allocations to health care, industrials, and materials than the other market-cap indices.
“Due to large allocations to financials among large-cap and broad market indices, these segments have been more negatively affected by new bank levies,” he says.
“These levies aim to tax the liabilities of the country’s five largest banks, which account for 36 per cent of the value of the S&P/ASX 50 and are subsequently excluded from mid-cap and small-cap indices.”
As other commentators have noted, though, the banks were attracting increasing concern prior to the levy proposal because of their reliance on continued growth in home lending and the possibility of a housing bubble, particularly in Sydney and Melbourne.
Meanwhile, despite having relatively diversified sector exposures and a lower allocation to the financials sector, small-cap stocks still lag the other market cap segments year-to-date, he says.
Their lower-than average dividend payments have probably also contributed to small-caps tending to lag, on average, in recent years.
Welling says the mid-cap market segment is often overlooked and underappreciated.
“Those looking for an edge in Australian equities might note that mid caps tend to offer a unique balance between the high growth (and therefore higher risk) of small caps and the stability (but slower growth) of large caps, which has led to meaningful outperformance year-to-date,” he says.
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Tags: S&P Dow Jones Indices, large caps, mid caps, small caps