Mid-cap companies are the most appealing in the medium term despite the likelihood that large caps m...
Mid-cap companies are the most appealing in the medium term despite the likelihood that large caps may benefit the immediate aftermath of the Iraqi war, according to Sam Liddle, fund of funds manager at Miton Investments.
Liddle says the indices being traded most at present are the large caps, but for investors looking for sustainability, the majority of the better dividend-paying UK stocks are in the Mid 250 Index.
According to SalomonSmithBarney (SSB), world mid-cap value has outperformed large-cap value by 10.5%, 4.55% and 1.1% pa over the past three, five and 10 years respectively.
Deep Kapur, co-head of global quantitative research at SSB, says through the 1990s mid-cap and large-cap style characteristics diverged.
Kapur adds while the two are now converging somewhat, mid caps continue to exhibit a value at the expense of growth bias, while large caps exhibit a growth at the expense of value bias.
Indeed, Liddle says he is not interested in playing a short-term trading game and looking over a 12 month horizon he prefers the mid cap area.
He adds: 'We are looking to achieve the best absolute returns. While there will be rallies in large caps I won't go chasing them because the better value is in the mid caps. The companies are more sustainable, the dividends are better and are more supportable in the mid caps. As such, in the UK I prefer the Mid 250 Index to the large caps.'
Overseas Liddle says the size of the company is less of an issue.
However, he still favours the funds that can cross all market capitalisations, rather than being restricted to just one. Kapur points to SSB's Global Risk Analysis Model (Gram), which states mid caps are likely to outperform whenever small caps generally outperform.
Kapur says the Gram analysis shows that mid-caps are most likely to outperform in an environment where value outperforms growth, global yields rise and the US dollar weakens against the yen but strengthens against the euro.
He says: 'This is a scenario that is most consistent with a slow growth, inflationary environment, which is not currently our economists' baseline case but still a perfectly plausible scenario given the current macro environment.'
Conversely, Richard Philbin, fund of funds manager at Isis Asset Management, is biased towards large-cap funds at present.
Philbin is anticipating a two to three month war with Iraq and believes there will be a relief rally when final change takes place in the region. This rally, he adds, will be driven by the large caps, which are the most liquid stocks.
He says the thought process at Isis focused on the more specialist large-cap funds.
If oil prices can be reduced globally, Philbin says it will benefit global GDP and it would be the large-caps that would benefit first in the early stages.
However, in the event that war does continue longer than predicted, Philbin says there will be a maintained drag because of the high oil price. Added to this he says the ongoing uncertainty would result in people spending less and consumer expenditure would slow down.
Large-caps to bounce if war goes well.
Mid-caps still look good over medium term.
Oil prices will stabilise if war is successful.
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