Mid-caps can provide exposure to many positive characteristics, while avoiding some of the challenges that can come with investing in large caps. They offer new opportunities, such as additional products and services, or new geographies. Growth opportunities tend to be big relative to the size of the business – so investment into these can make a meaningful difference to revenue and profits. Mid-caps also tend to do well in market recoveries.
Areas of growth:
Many mid-caps continued to grow in the uncertain environment, even delivering earnings far ahead of expectations. The disparity between winners and losers also widened through 2020.
- Struggling businesses with poor balance sheets, weaker leadership, and poorer operating models have found it difficult to keep up with the winners who are investing and growing. Retail is the clearest example of this, with businesses like Dunelm and AO World, the electrical retailer thriving.
- Telecoms, technology businesses and gaming powered ahead as we all adapted to life at home. In particular, mid-cap developers and service providers (to the big gaming companies) benefitted from the surge in gaming downloads, and the confident outlook driving an eagerness to invest in content creation. There were more direct beneficiaries too. These included the mid-cap specialists processing Covid-19 data and the roll-out of the furlough scheme for the government.
- Food producers such as Cranswick dealt strongly with considerable volatility last year; the increased demand for stay-at-home food consumption, social distancing in facilities, lockdowns, and the halt of exports to China. It took all of these challenges in its stride.
- Some mid-caps in more challenged sectors used the enforced ‘timeout’ to develop and improve. Trainline kept its strong IT team to invest in improvements to systems – a challenging task in normal busy environments.
- Others proactively raised capital during this period, not as an emergency measure but to acquire other businesses and support future growth plans. Keywords Studio did just that to continue its acquisition strategy as the global leader in video games services.
Glennie comments on the outlook for mid-caps in 2021:
“We are of course concerned about many factors, including unemployment, the duration of lockdowns and the strength of the economy. However, we remain optimistic about small- and medium-sized companies which tend to lead a market recovery.
“We believe the portfolio will continue to trade well, as it did in 2020. Our stock-specific focus on quality should help us find businesses that will continue to generate earnings upgrades. We showed the merits of this approach through 2020; our ability to identify growth businesses that, with strong product propositions, international opportunities and barriers to entry, exhibited the ability to grow even in a tough market environment. The market should reward these quality growth businesses with a strong premium in our view.
“We expect mid-caps will continue to show their might. There’s no doubt that challenges remain as the nerve-racking battle between virus and vaccines plays out, and as we see the full extent of economic and social damage. But there are reasons for optimism. These include the resilience and ingenuity we’ve seen from many small- and medium-sized companies – a reminder of their ability to flex their business models and cope with the most difficult of times. As conditions do improve, these companies will shine even brighter.”
ASI UK Mid-Cap Equity Fund performance:
The fund strongly outperformed its benchmark in 2020. It rose 4.7% against its benchmark.
| Year to 31/12/2020 (%) | Year to 31/12/2019 (%) | Year to 31/12/2018 (%) | Year to 31/12/2017 (%) | Year to 31/12/2016 (%) | |
| ASI UK Mid-Cap Equity Fund (Gross) | 5.51 | 40.66 | -7.71 | 17.07 | 11.82 |
| ASI UK Mid-Cap Equity Fund (Net) | 4.72 | 39.61 | -8.41 | 16.20 | 10.99 |
| Performance benchmark (FTSE 250 (ex. Investment Trusts) Index +3% | -5.48 | 33.79 | -12.15 | 21.24 | 8.08 |
Abby Glennie is fund manager of ASI UK Mid-Cap Equity Fund
