Investing in the middle
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June 16, 1998: 3:49 p.m. ET
As market rattles a bit, some experts say mid caps are a good alternative
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NEW YORK (CNNfn) - Mid-cap stocks are like the forgotten middle child in a family that never measures up. Even some of their supporters seem lukewarm.
But with the Dow Jones industrial average taking its biggest tumble of the year this week, some investors are starting to look beyond the glory days of large-cap stocks.
"I wouldn't say mid caps are a screaming buy, but they are somewhat attractive on a relative basis," said Gus Sauter, portfolio manager of the Vanguard Index Trust Mid Capitalization Stock Portfolio.
The fund mirrors the S&P MidCap 400 Index, a listing of companies with a market capitalization of $328 million to $17 billion
Why bother with mid-cap stocks, you ask? Vanguard, the mutual-fund giant based in Valley Forge, Pa., said the most obvious reason is diversification.
"A lot of people are starting to realize they need to diversify more than simply holding large cap stocks," Sauter said. "The more sophisticated investors are going for a 'total-market' concept. They're buying not just large caps, but mid caps and small caps."
Vanguard believes that mid-cap stocks will perform as well as large-cap stocks over 20 years, Sauter said. The fund, (VIMSX), which opened May 21, has $106 million in assets.
"It's a very good launch for us," Sauter said.
Large caps are the stellar performers of the 1990s bull market -- widely held companies on the S&P 500 like IBM (IBM), Coca-Cola Co. (KO) or General Motors (GMH). The index has a five-year annualized return of 20.27 percent as of 1997.
Small cap companies, with a market capitalization of less than $1 billion, are at the other end of the spectrum. These are fast-growing businesses with sex appeal on Wall Street that hope to become the next Microsoft Corp. (MSFT) or Intel Corp. (INTC).
Mid-cap companies lie somewhere in the middle, generally ranging from $1 billion to $5 billion in size.
The top performing stock in the MidCap 400 Index has been America Online Inc. (AOL), said Bill Jordan, a spokesman for Standard & Poor's index services. Shares of AOL doubled in 1998. In January the stock was trading at about 45, then AOL took off until it reached a high of 90 by the end of May. The stock was at 86-7/16 in late morning trading Tuesday.
Behind AOL on the index is bottler Coca-Cola Enterprises (CCE), and waste-management firm USA Waste Services (UW), Jordan said.
"This big, vast area in the middle is overlooked," Jordan said. "People tend to focus on the large and the small."
According to Morningstar Inc., a Chicago mutual-fund tracker, the S&P MidCap 400 Index earned 32.25 percent in 1997, compared with 33.35 percent for the S&P 500. But mid caps are lagging this year: As of June 1, the mid cap 400 index was up 7.96 percent, compared with 13.12 percent for the S&P 500.
Laura Lallos, a senior analyst at Morningstar, said the advantage of mid caps is they can give investors the best of large- and small-cap stocks. Like large caps, mid caps can be well-established companies. And like small caps, they have room to grow.
"Now is the time when investors are looking beyond large-cap stocks," Lallos said. "(But) I don't see an overwhelming trend."
Among the good performing funds within the mid-cap universe are Gabelli Asset Fund (GABAX) and Gabelli Value Fund (GABVX); Stein Roe Special Fund (SRSPX); Toqueville Fund (TOCQX); Franklin California Growth Fund (FKCGX); and T. Rowe Price Mid-Cap Growth Fund (RPMGX).
"The gap is narrowing (between large and mid caps)," Lallos said. "The rally has indeed broadened over the last year."
-- by staff writer Martine Costello
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