FTSE 250 has gained 36.85% from 9 march to 25 July and cheap stocks are hard to find
Fund managers believe the mid-cap area of the UK market is fully priced following sharp gains since the March lows.
Over the period 9 March to 25 July, the FTSE 250 index gained 36.85%, compared to the FTSE 100, which has grown by 22.22%. The FTSE Small Cap index, meanwhile, is up 35.57%.
Mark Hall, manager of the BWD Aggressive fund, believes the broader mid-cap area of the market has run out of steam.
'A few months ago, I could look at that part of the market and find stocks I felt were 20%-25% too cheap,' he said. 'Now, it is a far greater struggle to find that kind of valuation anomaly.
'Having said that, it is not easy to find good value in the FTSE 100 either and, at current levels of 4100 to 4200, I believe the blue-chip index is fairly valued.
'The real value opportunities are to be found by trawling around much further down the market cap spectrum. However, at this level, liquidity becomes a problem.'
Hall has been trimming back mid-cap exposure but said he has found good opportunities in certain stocks. 'I am not taking a view on mid-cap stocks per se but on a stock-by-stock basis, many companies have now hit my price targets so have been sold,' he added.
Richard Hughes, manager of the M&G Dividend fund, said mid-caps now have lower yields than FTSE 100 stocks so have become less attractive.
'My funds tend to be overweight mid caps because this is where the best yields have been found in recent times,' he added 'The situation has now reversed and the FTSE 100 is yielding 3.4%, while the FTSE 250 is yielding 2.9%.
'If this trend continues, there will be a migration out of the lower-yielding mid-cap stocks into higher-yielding FTSE 100 companies.
'The concept of going into larger companies that pay a yield premium amid a tricky economic environment is quite attractive.'
Karl Sternberge, chief investment officer at DWS Investments in the UK, also believes there is no reason for the rally in mid-cap stocks to continue. While his company tends to be overweight UK blue chips and underweight FTSE 250, exposure to mid-caps has been creeping up recently.
Mark Niznik, manager of the Standard Life UK Opportunities fund, believes mid-cap stocks are overvalued in the short term. However, they are still trading at a 20% discount to the All-Share so have significant upside over the mid to longer term.
Richard Buxton, manager of the Schroder UK Alpha Plus fund, has around 25% of the portfolio invested in FTSE 250 stocks and does not expect to lower this weighting in the short term.
'The case for investing in the FTSE 250 remains because a major re-rating of the FTSE 100 is reliant on a surge in interest for two of the major sectors: oil and pharmaceuticals,' Buxton said. 'There is no valuation impetus in the short term for buyers to flood the market.
'In the meantime, the FTSE 250 is still benefiting from heightened merger and acquisition activity and exposure to the domestic economy.'
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