A Focus on Relative Value Mid Cap

Viewpoints

February 02, 2018

As we enter 2018, we hold a very high conviction for the Relative Value Mid Cap (RVMC) strategy. RVMC has been recognized for excellent performance throughout 2017. Mid caps present a compelling investment case as they have outperformed large caps by approximately two percentage points on an annualized basis over the last 20 years (as measured by Russell Midcap and S&P 500 Indices) and they deserve to play a more significant role in investors’ portfolios. At this point in the cycle, concurrent with a long economic expansion, corporate tax cuts could be the spark to drive domestic-oriented mid cap stocks.

RVMC has been ranked a WSJ “Category King” for outstanding performance in 2012, 2016 and eight times in 2017. The WSJ ranks the strategies by either year to date (YTD) performance, at month end or 1 year performance at quarter end.

2017 Accolades

  1. YTD as of January (ranked 6th)
  2. Last 12 months ending March (ranked 4th)
  3. Last 12 months ending June (ranked 3rd)
  4. YTD as of July (ranked 9th)
  5. Last 12 months ending September (ranked 1st)
  6. YTD as of October (ranked 5th)
  7. YTD as of November (ranked 6th)
  8. Last 12 months ending December (ranked 5th)

2017 Performance

RVMC (gross) +20.97%
RVMC (net) +20.00%
Russell Midcap Value +13.34%
Russell Midcap +18.52%

3 years ending 12/31/2017 (annualized)

RVMC (gross) +10.94%
RVMC (net) +10.05%
Russell Midcap Value +9.00%
Russell Midcap +9.58%

Below are some reasons to consider RVMC:

  • The TCW Relative Value team took over management of the Mid Cap strategy effective July 1, 2011 upon the retirement of the former PM. It is managed using the Relative Value time tested philosophy and process along with an investment team that has worked together for over 16 years.
  • The tax bill should have a greater impact on small and mid cap companies as they generally pay much higher effective tax rates than large cap companies (which many have offshore lower tax jurisdictions).
  • Over the past 20 years, ending 12/31/2017, the Russell Midcap (mid cap stock index) posted an average annual total return of 10.33% versus the Russell 1000 (large cap stock index) and the Russell 2000 (small cap stock index) returns of 8.49% and 8.52%, respectively, per Bloomberg. Mid cap outperformance holds true over the past 10 and 15 years as well and is in line for the last five years.
  • RVMC has a high active share of 94% versus the Russell Midcap (as of the end of 2017). This provides the opportunity for benchmark outperformance and the strategy’s suitability for pairing with a passive investment or with other, complementary midcap strategies.
  • In addition to offering greater total return potential, mid cap stocks can counterbalance an overly conservative stock portfolio and can do so with potentially less risk than small cap stocks. Mid cap stocks can provide some of the stability of blue chips along with some of the accelerated small cap growth potential.
  • Mid cap stocks receive less Wall Street analyst coverage than their large cap brethren which presents an opportunity for investors to find companies whose prices may not yet reflect their value or potential. For instance, FactSet indicates mid cap Beazer Homes is followed by only five sell-side analysts whereas large cap Lennar is followed by 21. Greatest investment rewards are frequently correlated with less investor coverage.
  • Since the collapse in energy prices in 2014 and 2015, earnings for energy companies of all sizes, especially less diversified mid caps, have suffered. The Russell Midcap has had higher weights in energy and materials for the past few years, a characteristic that continues relative the Russell 1000, S&P 500, and Russell 2000. The potential for a recovery in oil and other commodities will benefit mid cap companies that have a specific self-help catalyst. As of 12/31/2017, materials + energy make up ~12% of Russell Midcap and ~13% of RVMC versus ~9% in the Russell 1000 and S&P 500.
  • Despite the higher standard deviation relative to large caps, according to Zephyr, over the past 15 and 20 years, mid caps sported higher Sharpe ratios than the Russell 1000, S&P 500, and Russell 2000, ending November 2017. For the 5 and 10 year periods, the Russell Midcap Sharpe ratio ranks between the large cap and small cap indices.

 

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This material is for general information purposes only and does not constitute an offer to sell, or a solicitation of an offer to buy, any security. TCW, its officers, directors, employees or clients may have positions in securities or investments mentioned in this publication, which positions may change at any time, without notice. While the information and statistical data contained herein are based on sources believed to be reliable, we do not represent that it is accurate and should not be relied on as such or be the basis for an investment decision. The information contained herein may include preliminary information and/or "forward-looking statements." Due to numerous factors, actual events may differ substantially from those presented. TCW assumes no duty to update any forward-looking statements or opinions in this document. Any opinions expressed herein are current only as of the time made and are subject to change without notice. Past performance is no guarantee of future results. © 2017 TCW