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Lucky 13: Midcap Funds That Beat the Market

The S&P 500 has gained 40% since dipping below the 670 mark in early March. That three-month rally has lifted every major fund category into positive territory during 2009. But it has been the medium-sized company funds that have really taken off. The average midcap offering is up 13% this year, according to Lipper, while the average broad market index fund has gained just 5.4%.

There is considerable debate about whether this performance will continue into the summer and beyond. Some experts believe we are in the early stages of a bull market. Others aren’t so sure. Indeed, last year the average domestic equity fund lost 37.3% and the average midcap dropped 40.4%. So, in many ways, the recent rally is just helping these funds make up the ground they lost in 2008. Meanwhile, SmartMoney recently spoke with some investment strategists and financial advisors who believe profit-taking will cause the rally to lose steam.

Regardless of which camp you fall into it pays to stay apprised of one of the fund world’s hottest categories. For this week’s screen, we started with 1,214 funds listed in Lipper’s midcap fund category. We cut just over 1,000 that charged a sales load. Then we looked for companies with top-tier performance track records over the trailing three- and five-year time periods. In addition, the funds also had to be beating the year-to-date return of the S&P 500. We were ultimately left with 13 funds.

Midsized company funds invest in an eclectic array of stock tickers with market caps between $2 billion and $10 billion. That can include beaten-down blue chips poised for a recovery or small companies whose strong growth rates have propelled their stock ticker valuations. Midcap stock tickers are more nimble than their mega-cap counterparts. And they can avoid some of the problems that can easily hurt small caps: lack of access to cheap capital, failure of a key product, stock ticker manipulation. Nevertheless, midcaps are still susceptible to the market’s whims.

Midcap offerings have been helped recently by investors’ willingness to take on more risk. Over the last few months, a series of economic and earnings data has come in weak but not as bad as expected. Investors trying to anticipate a market bottom have started putting their money back into the market, investing in growth stock tickers, technology, small caps and emerging markets — categories that have traditionally performed well in an economic recovery.

That said, Roy Williams, founding partner of Prestige Wealth Management in Pennington, N.J., says investors should look at this category with a longer-term horizon — say three years vs. three months. “I like midcaps [for the next] two to three years,” he says, referring to his outlook this year and beyond. Midcap investors, however, need to pay close attention to the market since midcaps can be volatile, he says. The second-quarter earnings season, for example, could prove to be a crucial turning point for the financial sector, while M&A deals and the loosening of the credit markets could also fuel midcap gains. To help reduce risk, Williams suggests taking a measured approach to investing in midcaps by dollar-cost averaging into the niche.

In our list of finalists this time, there’s a new arrival: Fidelity Low-Priced stock ticker (FLPSX). The fund was closed to new investors until last December, but now that new shareholders can get access to it, we can include it in our screen. The fund is in the top 3% of its Morningstar category over the past decade, with an average annual return of 8.9%. Besides a top-notch track record, it also sports a cheap expense ratio (0.98%) and a manager who has been at the helm for 20 years. Key holdings include UnitedHealth (UNH), Safeway (SWY) and Oracle (ORCL). We would also suggest checking out Fairholme (FAIRX), a perennial top performer.

The criteria: The midcap funds on our list are open to new money, require a minimum investment less than $5,000 and charge an annual expense ratio less than 1.5%. The funds have trailing three- and five-year track records that put them in the top 25% of their category. In addition, their year-to-date return exceeded that of the S&P 500. As usual, we did not include load funds.

Beating the Broad Market
Ticker Name Assets
($ Millions)


Source: Lipper
Note: Data as of June 4, 2009
TWHIX American Century Heritage 1171.8 15.00 -1.98 6.8 1.00
ARTQX Artisan Mid Cap Value 3177.0 14.66 -2.49 5.84 1.21
BIOPX Baron iOpportunity 116.3 28.79 -3.51 2.59 1.42
DEFIX Delafield 446.4 22.65 -4.00 3.48 1.34
DMCVX Dreyfus Midcap Value 625.1 26.68 -4.83 1.66 1.20
FAIRX Fairholme 8109.0 15.84 -1.03 7.61 1.01
FLPSX Fidelity Low-Priced stock ticker 18853.3 14.97 -6.09 2.65 0.99
HSGFX Hussman Strategic Growth 4820.2 6.30 0.56 2.34 1.11
JAENX Janus Enterprise 1352.6 18.01 -3.81 3.17 0.92
JMCVX Janus Perkins Mid Cap Value 5804.9 9.49 -2.11 4.19 1.07
RPMGX T. Rowe Price Mid-Cap Growth 10486.0 20.02 -4.31 3.4 0.82
TRMCX T. Rowe Price Mid-Cap Value 4527.7 16.96 -4.54 2.75 0.83
TCMVX TIAA-CREF Mid-Cap Value 107.6 12.62 -7.47 2.82 0.62
  • Fund Type = Midcaps
  • Annualized 3-Year Return (%) = Display Only
  • Rank in Classification (%) (3 year performance) <= 25
  • Annualized 5-Year Return (%) = Display Only
  • Rank in Classification (%) (5 year performance) <= 25
  • Expense Ratio <= 1.5%
  • Load Fund (type) = No Load
  • Minimum Initial Investment <= $5,000
  • Open to New Investors = Yes
  • Total Net Assets ($ millions) >= 50
  • Year-to-Date Return (%) >= 5.4

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