Allocating to Mid-Cap
With many factors at play, we believe that investors should benefit from an allocation to mid-cap stocks. Not only will an allocation to mid-caps help diversify investor portfolios, but it has proven to enhance returns with only minimal additional risk. Exhibit 9 illustrates the benefit of making an allocation to mid-caps and highlights that portfolios with higher allocations to mid-caps experienced the greatest benefit.
While investors’ allocations to mid-cap should be consistent with their risk tolerance, including a mid-caps allocation has historically resulted in improved portfolio performance with a minimal increase in risk. Reallocating from large caps to mid-caps has improved the diversification of the portfolio and resulted in better risk-adjusted returns.
EXHIBIT 9: Comparison of Return, Risk and Sharpe Ratio for Mid-Cap Allocation Scenarios
Source: Russell Family of Indexes, FactSet, 12/31/10
Small Cap = Russell 2000 Index
Mid-Cap = Russell Midcap Index
Large Cap = S&P 500 Index
Past performance is not indicative of future results.
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Equity securities (stocks) may be more volatile and carry more risk than other forms of investments, including investments in high grade fixed income securities. Mid and small capitalization funds typically carry additional risks since smaller companies generally have a higher risk of failure.
Indexes are unmanaged and investors cannot invest directly in an index.