Medium-sized companies (mid-caps) are overlooked by investors yet could offer an attractive “sweet spot” amid current market volatility, Aberdeen has found.
Using data going back to 2009, globally midcaps are trading at record low valuations compared with large firms, despite the fact they have provided better returns than their larger peers over the past 25 years and could provide helpful diversification from US mega stocks. The MSCI ACWI Mid-Cap Index consists of companies with a typical market capitalisation of $10bn to $40bn, though market capitalisation of medium-sized companies varies significantly by geography.
This segment offers the potential for higher returns than large caps but with lower levels of risk than small caps. The data below shows that over a 25-year period to 27 April 2025, the average growth of the MSCI World Mid-Cap Index was higher than for the MSCI World Large-Cap Index. However, the average volatility for MSCI World Mid-Caps – as defined by the standard deviation of the index – was lower than for MSCI Small-Caps. This supports Aberdeen’s view that global mid-caps sit in a “sweet spot”, although past performance is no guarantee of future returns.
Source: Aberdeen, Morningstar, 27 April 2025. Average over 25 years, USD. Past performance is no guide to the future
Diversification benefits
Global mid-caps, as defined by the MSCI World Mid-Cap Index, are less exposed to the US stock market than large caps. The MSCI World Mid-Cap Index has a 62% weighting towards the US, compared with 72% for the MSCI World Index.
Therefore, investors wanting to diversify their portfolios away from the US could consider an allocation to global mid-caps.
Valuations
What’s more, global mid-caps are trading at record low valuations relative to large-caps. The chart below shows the price to earning (p/e) ratio of mid-caps relative to large caps since 2009 (based on the MSCI World Mid-Cap Index and MSCI World Index) compared with the long-term average.
The p/e ratio is a tool investors use to analyse whether a stock or market is over or under-valued. The chart below shows that the p/e ratio of mid-caps relative to large caps is the lowest it has been since 2009 and well below the long-term average – suggesting that mid-caps are currently cheap compared with their large-cap counterparts.
Source: Aberdeen, Bloomberg, to 31 March 2025
The market sell-off
Investors have pulled less money out of global mid-caps than both large and small-caps amid the current market sell-off. This could reflect the attractiveness of this “sweet spot” in the current market turmoil.
Up to April 27, the cumulative return year-to-date for the MSCI World Mid-Cap Index was -0.47%, Aberdeen analysis of Morningstar data shows. This was a smaller sell-off than those experienced by the MSCI World Index (-1.94%) and by the MSCI World Small-Cap Index (-4.10%).
Anjli Shah, manager of the abrdn SICAV I – Global Mid-Cap Equity Fund, said:
“Globally mid-caps have long been overlooked and under-loved by investors. Still today there are only a handful of global funds that focus exclusively on this part of the market. But, considering the diversification benefits they offer, now may be the time for investors to consider introducing a specific allocation to mid-caps into their portfolios.
For companies to have made it from small to mid-cap, they tend to have established and resilient business models while remaining nimble. Thus, mid-caps can potentially offer lower levels of risk than small-caps.
Despite these attractive characteristics, market inefficiencies still exist. Mid-caps are often under-researched and under-covered versus large-caps. These market inefficiencies present an opportunity for us to find hidden gems.
Investors buying in currently would be investing at a time of record low valuations relative to large-caps – which could be an attractive entry point.”
Rebecca Maclean, co-manager of the Dunedin Income Growth Investment Trust, comments on the picture for UK mid-caps:
“We see numerous compelling opportunities among UK mid-caps for long-term investors. Recent market turmoil and slowing global growth have renewed investor attention on the UK mid-cap sector, which offers superior earnings growth, a stronger domestic focus, and a persistent valuation gap relative to large caps.
UK mid-caps provide distinct advantages over the FTSE 100, where earnings are predominantly generated overseas. In contrast, 50% of FTSE 250 revenues come from the UK, making them more closely aligned with domestic economic trends. Historically, the UK mid-cap index has delivered stronger long-term earnings growth compared to their large cap peers. Projections suggest this trend will continue—with FTSE 250 earnings growth expected to outpace FTSE 100 going forward.
Crucially for long-term investors, UK equities remain undervalued, and this is particularly evident in the mid-cap segment. The UK market is currently trading 20% below its long-term average price-to-earnings (p/e) ratio while the FTSE 250 is at a 20-year low in p/e discount relative to the FTSE 100.”
