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Middle Management: Increasing Mid Cap Allocations

Christopher Gannatti, CFA, Head of Research, Europe

It is hard being stuck in the middle. Just look at mid-cap stocks. On a historical basis, mid-caps outperform their large- and small-cap counterparts. Yet many investors typically favor the perceived stability of large caps or the growth prospects offered by smaller companies. Mid-caps aren’t as widely followed as the S&P 500 Index, and any mid-cap or mid-cap value premium isn’t widely discussed. Still, mid-caps provided superior long-term, risk-adjusted returns, a trait WisdomTree believes is durable.   No Performance Anxiety for Mid-Caps Investors thinking about a potential under-allocation to any asset class usually “follow the performance.” With mid-caps, it’s instructive to analyze rolling periods.1Rolling Three-Year Periods: Based on available data since July 31, 1991, the S&P MidCap 400 Index beat both the S&P 500 and Russell 2000 indexes almost 50% of the time. • Rolling Five-Year Periods: The S&P MidCap 400 Index beat both the S&P 500 and Russell 2000 indexes almost 70% of the time. • Rolling 10-, 15- and 20-Year Periods: The S&P MidCap 400 Index beat the other two indexes in 100% of rolling periods of these three distinct lengths.   Rolling Periods: The Longer the Horizon, the Stronger the Mid-Cap Stocks Longer the Horizon   Mid-Cap Risk Isn’t Excessive Our analysis of rolling periods clearly shows the long-term strength of mid-caps but this doesn’t account for risk. It is the perception of elevated risk that shifts investors’ focus away from mid-caps. Rolling period Sharpe ratios of mid-caps had superior risk-adjusted returns.2Rolling Three-Year Periods: We saw that the S&P MidCap 400 beat both the S&P 500 and Russell 2000 indexes in almost 50% of these periods. Shifting from absolute returns to the Sharpe ratio, we see that the S&P 500 and S&P MidCap 400 led during almost the same amount of these periods. The S&P 500 typically had a lower risk, whereas the S&P MidCap 400 typically had higher returns. • Rolling Five-Year Periods: Interestingly, on an absolute return basis, the S&P MidCap 400 outperformed both the S&P 500 and Russell 2000 indexes about two-thirds of the time. Shifting to the Sharpe ratio yielded the same result, but the biggest change was that the higher risk of the Russell 2000 led to the S&P 500 leading in a greater number of rolling periods. • Rolling 10-, 15- and 20-Year Periods: Similar to the absolute returns analysis, on a Sharpe ratio basis the S&P MidCap 400 Index dominates both the S&P 500 and Russell 2000 indexes.   Rolling Periods: Mid-Caps Also Did Well at Risk-Adjusted Returns Mid-Cap Performance   Risk/Return Says Mid-Caps Warrant Consideration Empirical long-term data proves that mid-caps are strong performers, calling into question the disproportionate amount of attention afforded to large and small caps while mid-caps quietly outperformed on both a risk-adjusted and absolute basis.         1Sources: WisdomTree, Bloomberg, with data from 7/31/1991 to 3/31/2016. 2Sources: WisdomTree, Bloomberg, Kenneth French Data Library (for risk-free rate) from 7/31/1991 to 3/31/2016.

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Equity, Mid-Caps

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