Maroun Younes

Investors seeking exposure to global equity markets shouldn’t ignore mid-cap companies which offer the opportunity for superior returns and superior risk adjusted returns, says Maroun Younes, co-portfolio manager of the Fidelity Global Future Leaders Fund.

He says that while investors often focus on either the large-cap or small-cap parts of the market, mid-caps shouldn’t be overlooked.

“Global mid-cap equities have been under appreciated in the past but offer excellent opportunities for investors looking for exposure to global equity markets,” he says.

“Mid-caps sit at what might be called the ‘sweet spot’ between large-cap and small-cap stocks. They can offer more growth than large-caps, with less risk and volatility than small- and micro-caps. Indeed, if we look back over the past quarter of a century or so, global mid-caps have generated higher returns than large caps.

Mr Younes says that mid-caps can also add valuable diversity to a portfolio.

“The global large-cap investing universe is heavily influenced by a small number of mega-cap names, many of them in the Tech sector, who have driven performance of the market index for a number of years.

“These stocks have come to be known as the MANAMA stocks (i.e. Microsoft, Apple, Netflix, Amazon, Meta, Alphabet). The growth of these tech-related names has been so strong in recent years that they have made an outsize contribution to the performance of the World index overall.

“But it is difficult to argue that the performance of a handful of stocks that drive a large proportion of the overall market performance is a sustainable or desirable characteristic for the market over the longer term.

“By contrast, the global mid-cap universe of stocks is far more diverse at stock level with no single names, or groups of names, driving performance on the market. The mid-cap universe is home to many potential ‘multi-baggers’ – companies that have the potential to grow many multiples of their current value.

“This diversity of opportunity is a far more desirable investment characteristic than a top-heavy concentrated market where the risk of getting the key names wrong can have an undue bearing on performance success in global large-caps.”

He adds that, with significantly lower analyst coverage of stocks in the mid-cap universe compared to large-caps, there are excellent opportunities to add value by rigorous bottom-up research and active management in this asset class.

“Fewer investors researching these names increases the likelihood of high-quality business flying under the radar, allowing for mispriced opportunities. Investors can also quite often ‘miss the forest for the trees’, not realising that there are well-established businesses with strong track records alongside the more obvious listings of newer companies and business models.

“Many of these businesses are also founder-led. This increases the likelihood that management teams are innovative, agile, and their interests are strongly aligned with outside shareholders. Sometimes these businesses are unique niche operators or specialists who dominate their field. At other times they are part of a large global theme. Sectors such as technology, health care, globally focused consumer, and industrials have more recently been home to such business models.

“Overall, global mid-caps offer the opportunity for an excellent diversifying exposure with a greater probability of above-index performance over medium and longer time periods,” Mr Younes says.

The Fidelity Global Future Leaders Fund was launched 28 September 2020 and since inception three years ago has returned 10.35% pa outperforming the index by 1.25%^[1].

———

[1] As at 28 September 2023. Index: MSCI World Mid Cap Index NR: NR at the end of the benchmark name indicates the return is calculated including reinvesting net dividends. The dividend is reinvested after deduction of withholding tax, applying the withholding tax rate to non-resident individuals who do not benefit from double taxation treaties.

The post Global mid-caps offer attractive returns for equity investors appeared first on AdviserVoice.