Investment management professionals are like physicians—we take care of our clients, not only of their wealth but also of their well-being, through the science of investing. Dedicated investment-management professionals ask, listen, empathize, educate, prescribe and treat.


U.S. Mid Cap Equity Fund Investment Philosophy and Approach (Core, Value, Growth)

In the U.S., mid-capitalization companies are typically defined as those having a market capitalization range of $2 billion to $10 billion. During the period of January 1979 through December 2012, the mid-cap equities as measured by Russell Midcap Index had generated a total return of +5,059%, while the general large caps and small caps had returned +2,713%, and +3,208%, respectively. Beyond that, the significant outperformance can be visualized on a rolling-period-basis as well.

Pic 1

Additionally, U.S. mid-cap stocks have achieved greater risk-adjusted performance which can be illustrated from the graph and Sharpe Ratio statistics below:

Pic 2

Furthermore, the U.S. mid caps participated in more of market’s upside than the large caps, while avoiding relatively more of the downside as measured by upside capture ratio and downside capture ratio:

Pic 3

An interesting study by fellow research teams including RidgeWorth Investments finds that:

  1. Mid-cap companies are typically small-cap companies that have succeeded
  2. Mid-cap companies typically have greater financial liquidity and better capital-raising ability than small-cap companies
  3. Mid-cap companies typically have higher cash flows and earnings acceleration to large cap companies
  4. Mid-cap stocks have less sell-side and buy-side research coverage which leaves a myriad of inefficiencies that can be exploited
  5. There are fewer active fund managers covering mid-cap stocks; in addition, the sufficient dispersion in the U.S. mid-cap universe gives good active managers the potential to enhance investor returns
  6. When expected volatility rose, mid-cap equities usually outperformed small caps; while immediately following periods of high volatility, small caps outperformed mid-caps

U.S. Mid Cap Value Style Investing

Fundamentals drive stock price; capital preservation improves returns; firm culture shapes investment decisions. In general, U.S. mid cap value fund managers favor companies that possess good long-term economic dynamics, conservative balance sheets, and attractive normalized valuations.

I talked to a U.S. mid cap value manager recently and he mentioned the characteristics of high quality and low risk businesses in his opinion are those with:

  • Attractive long-term underlying economics of the business
  • Most favorable industry structure
  • Skilled and shareholder-friendly management
  • Conservative and easy-to-be-valued balance sheet
  • The management style that always tries to avoid equity impairment and short-term price risk

Research & Screening Process

  1. Identify the universe for idea generation
  2. Verify and analyze quantifiable factors (e.g. financial health, industry cycle), evaluate subjective factors (e.g. management strength, industry structure), and perform due diligence
  3. Communicate background materials, investment thesis, validate valuation models, and make investment decision
  4. Collaborate and decide how the new idea will fit into the portfolio.
  5. Monitor the company’s progress relative to analysts’ initial investment thesis for capital weighting and portfolio construction purpose
  6. Risk control can be achieved through initial margin of safety, sector diversification, continuous new information review, market behavioral biases capture, and disciplined execution at every entry and exit

U.S. Mid Cap Growth Style Investing

The prime growth factors in the U.S. mid-cap growth businesses are:

  • Durable profitability – Companies with attractive margin structure can drive superior earnings growth
  • Sustainable revenue growth, i.e. solid barriers to entry, favorable pricing, and demonstrated product and service track record that can aid top-line prospects
  • Favorable industry dynamics that allows managers to leverage intellectual capital
  • Management strength and integrity is always a critical element of a high quality company. Growth, profitability, and shareholder returns provide insight into management effectiveness
  • Understanding market’s expectations of a company is important in assessing risk/return opportunity sets

Sell Discipline

A sell decision is made in any of the occurrences:

  • Fundamentals deteriorate
  • Investment thesis changes
  • Valuation targets have been exceeded
  • Management-related issues

In the conflict of good fundamentals with unexpected management-related issues, the manager usually makes a sell decision no matter of the stock’s fundamental prospects.

The Utilization of “Tier Board” – A Risk Control Tool

I have met not only one fund manager in the U.S. mid-cap strategy space that utilizes a “Tier Board,” which is a risk management tool for monitoring, ecurity and sector positioning. The board combines fundamental, quantitative, and technical factors to assess capital allocation weightings by name. It was designed as a tool for team dialogue, risk planning and thus better position the portfolio to capture upside, while mitigating potential downside.

*Graphs were created with MPI Stylus TM*


One response to “U.S. Mid Cap Equity Fund Investment Philosophy and Approach (Core, Value, Growth)”

  1. I came to your “U.S. Mid Cap Equity Fund Investment Philosophy and Approach (Core, Value, Growth) | Chenjiazi Zhong 钟陈佳子” page and noticed you could have a lot more traffic. I have found that the key to running a website is making sure the visitors you are getting are interested in your subject matter. There is a company that you can get traffic from and they let you try it for free. I managed to get over 300 targetted visitors to day to my website. Check it out here:

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

Create a website or blog at

%d bloggers like this: