You hear most investors talking about the security of large caps or the growth potential of small caps in an inflationary environment, but you rarely hear people gush about midcaps... and that's great, says Brian Lazorishak of Chase Investment Council.
Gregg Early: I’m here with Brian Lazorishak, who is portfolio manager of the 4 Star Chase Mid Cap Growth Fund (CHAMX).
Brian, there is a lot of talk in the markets about buying large-cap stocks for safety. And, in a highly inflationary environment, which people are talking about because of quantitative easing and the cheap dollar, small caps are the way to go. Now, you make the case for midcaps, and I think that it’s an important case to make, so I’d love to hear it.
Brian Lazorishak: We’ve liked midcaps as an asset class compared to large and small caps for some time. Obviously, we’re speaking to our own style a little bit there.
But the numbers really back this up: from a longer-term standpoint, they offer a pretty good risk-reward tradeoff. If you look at the ten, 20, 30 years ended 2011, midcaps have actually outperformed both large and small caps in terms of absolute return, with a risk profile somewhere between the two.
They're not necessarily the best absolute performer, but we think you get some of the benefits of small cap investing without as much risk as you see in small caps, both at an overall portfolio and individual company level.
Gregg Early: They’re kind of like the Goldilocks stocks, right? They’re a little bit more dynamic than the large caps with more growth potential, and yet they don’t have the risk of the wing-and-a-prayer that a lot of the small caps do?
Brian Lazorishak: That’s exactly right. You have companies that in many cases are at an earlier point in their growth curve, so they really have the ability to grow faster without the individual risks of being completely one-product companies, as many small caps are. They tend to have more seasoned management teams than you typically see with small-cap companies.
In many cases, they can grow faster than large caps by virtue of being very specialized and being in specific areas where the best growth opportunities are. Where some large-cap firms—because of their size—to continue to grow have to be so broad and so diversified that it can be difficult to grow much more than the economy.
Gregg Early: Right, and when they're so diversified, no one sector or division really affects the overall stock price. You could have good sales in something that might pop up, so they’re diversified to the point of just keeping themselves afloat to a certain extent. They’re looking more for safety than growth than a midcap would.
Brian Lazorishak: I think that’s right. The downside to diversification is what you just hit on. It is that a big, broad company—let’s take United Technologies (UTX), for instance—is so diversified that results in any one division don’t really move the needle.