The FTSE Mid 250 Index has started to attract a lot more interest from investors recently so it is w...
The FTSE Mid 250 Index has started to attract a lot more interest from investors recently so it is worth looking at some of the reasons why the investment opportunity is so attractive
Although the FTSE Mid 250 Index was introduced as long ago as 1993, investors have generally been more interested in the FTSE 100 Index and, to a lesser extent, the small cap index below the top 350 stocks. But this year the Mid 250 Index (ex-investment trusts) has outperformed the FTSE 100 Index by over 8%. Investors are increasingly turning to mid cap stocks to obtain the best value and the fastest growth prospects
In terms of value, the average P/E ratio of a mid cap stock at the beginning of 1997 stood at a 50% premium to the average FTSE 100 stock but today they stand at a 35% discount to the FTSE 100. This savage derating of mid cap stocks makes them look incredibly cheap relative to the FTSE 100 at a time when much of the liquidity that has been driving blue chip stocks higher is beginning to dry up
This means that investors are much more interested in identifying genuine value than they are in chasing larger stocks and many of the best bargains are to be found in the mid 250 area. Take NFC as an example. The market for logistics and outsourcing has attractive growth prospects, the management team is focussed on delivering shareholder value and yet the shares languish on a 25% prospective PE discount to the All-Share Index on our forecast earnings. Arguably it should be worth a premium rating to the market, so the upside potential in the shares is significant
Many other mid cap stocks look similarly undervalued, particularly amongst the basic industry and general manufacturing sectors which are well represented in the Mid 250 Index and should start to do much better as economic growth picks up next year
The other exciting area is growth. Many of the UK's fastest growing companies reside in the Mid Cap index. The information technology sector, for instance, is experiencing much faster growth rates than other sectors of the market and is a large component of the Mid Cap Index, yet it represents less than 1% of the FTSE 100 Index. Furthermore, many of these companies have the chance to double or treble in value over the next year or so. I cannot think of a single FTSE 100 stock that I would like to bet money on doing the same thing
So as well as holding stocks like NFC, we also has significant exposure to fast growing companies like ARM Holdings, London Bridge, and CMG in information technology where the demand for the products and services these companies supply is likely to remain high. Other interesting niche companies also held in the fund are Aegis, a media services provider which is growing fast; Baltimore, a company providing secure transmission services over the internet
Derek Lygo, is portfolio manager at Dresdner RCM Global Investors (UK
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