Defined contribution Mind the gap
Key takeaways
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Out of balance?:
Many investors appear to be underexposed to mid-cap strategies in their equity allocations.
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A potential "sweet spot":
Mid-sized companies are often described as a potential “sweet spot” of equity investing.
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Take an active approach:
Mid-cap stocks tend to have far less analyst coverage and fall under the radar, offering outperformance potential for active managers.
Refocusing on mid-caps: An often-overlooked segment of the US equity market
Mid-cap equities offer a compelling yet often overlooked opportunity for defined contribution (DC) plans. Yet many participants—particularly core menu investors—appear to be missing out on the opportunity to include mid-cap strategies in their equity allocations.
Consider that mid-caps make up 21% of US equity market cap1 but only 9% of US equity investor assets.2 Looking specifically at DC plan assets, the average participant allocation is only 7.1% across small- and mid-cap strategies combined.3 Since many participants are underexposed to mid-cap stocks, they may be missing out on this potentially attractive area of the market.
Mid-sized companies are often described as a potential “sweet spot” of equity investing that combine some of the best features of large- and small-cap stocks.
With that in mind, plan sponsors and their advisors may want to reconsider their mid-cap offerings to help expand on the full potential offered by the asset class.
Growth, value or core?
To help keep things simple for participants, a single, carefully chosen mid-cap strategy may be sufficient for most plan menus.
Growth securities in the mid-cap segment have been particularly rewarding, compounding much faster in earnings growth rates compared to the broader mid-cap market. For example, earnings per share growth over the past five years for the mid-cap growth segment was 19.07% compared to 13.17% for broad mid-caps.4 This isn’t surprising, given the types of industries that tend to make up growth sectors.
Weighing the active vs. passive debate
Historically, the mid-cap market has been less efficient than the large-cap market because these stocks usually have far less average industry analyst coverage and often fall under the radar. This relative lower broad coverage could help offer greater outperformance potential through active management.
What to look for in strategy selection
- Proven outperformance across a wide range of markets
- Investment team tenure and stability
- Style consistency
- Strategy size and the potential for capacity constraints
Find out why adding a dedicated mid-cap allocation may help DC plan participants strengthen their retirement outcome potential.
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The opinions expressed are those of the authors, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.
Any products referenced are not intended to represent any specific Invesco products.
The Russell Midcap Index measures the performance of the mid-cap segment of the US equity universe. The Russell Midcap Growth Index measures the performance of the mid-cap growth segment of the US equity universe. An investment cannot be made into an index. The Russell Indexes are trademarks/service marks of the Frank Russell Co. Russell® is a trademark of the Frank Russell Co.
As with any comparison, investors should be aware of the material differences between active and passive strategies. Unlike passive strategies, active strategies have the ability to react to market changes and the potential to outperform a stated benchmark. Other differences include, but are not limited to, expenses, management style and liquidity. Investors should consult their financial professional before investing.
Stocks of medium-sized companies tend to be more vulnerable to adverse developments, may be more volatile, and may be illiquid or restricted as to resale.
Value and growth are types of investment styles. Growth investing generally seeks stocks that offer the potential for greater-than- average earnings growth and may entail greater risk than value investing. Growth stocks tend to be more sensitive to changes in their earnings and can be more volatile. Value investing generally seeks stocks that may be sound investments but are temporarily out of favor in the marketplace and is subject to the risk that the valuations never improve or that the returns will trail other styles of investing or the overall stock market.
Earnings-Per-Share (EPS) refers to a company’s total earnings divided by the number of outstanding shares.
Diversification/asset allocation cannot eliminate the risk of fluctuating prices and uncertain returns and does not assure a profit or protect against loss.
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