The big-time potential of small cap stocks [PODCAST]
Pinpointing winners requires a sound investment process.
Pinpointing winners requires a sound investment process.
By Gene Walden, Senior Finance Editor | 03/12/2021
For investors, the mid-cap sector can get lost in the shuffle between the alluring promise of small-cap stocks and the familiar market leaders of the large-cap sector.
But the mid-cap market – which encompasses stocks in the range of about $7 billion to $35 billion in market cap – offers a world of opportunity for investors looking for long-term growth potential with a bit more stability than many of the stocks of the small-cap universe.
“The mid-cap market offers more established business models, more established management teams, and a little less risk versus small cap stocks,” explained Brian Flanagan, senior portfolio manager of Thrivent Mid Cap Stock Fund (TMSIX). “And it typically offers better growth opportunities versus large cap stocks.”
While the large cap sector has been leading the way in terms of performance recently – particularly the technology area – Flanagan points out that “over the long-term, mid-caps have traditionally offered better growth than the large caps.”
Although the mid-cap universe has trailed the blue chips in recent years, as the economy unwinds from the pandemic, Flanagan sees a number of factors that could favor the growth of mid-cap stocks:
“If you add up all of these factors,” he added, “we should see strong growth going forward. That may be especially true in the cyclical sectors that have been struggling over the past few years and that have a fairly substantial weighting in the mid-cap space.”
Thrivent Mid Cap Stock Fund – Class S (TMSIX) was recently recognized as a Refinitiv Lipper Fund Awards 2021 winner for “Best Mid-Cap Core Funds Over 5- and 10-Years” (out of 245 and 170 funds, respectively, for the period ended November 30, 2020). (See: Our Achievements)
Flanagan attributes much of that success to three key factors – people, process and patience.
“Thrivent has an outstanding investment division with experience through many different market cycles and dynamics across industries,” said Flanagan, “The Fund management team – Brett Schweisow, Chad Miller and I – has the support of a 24-person fundamental and quantitative research team with over 19 years of average experience.”
Their investment process focuses on adding value by investing in attractive companies at good valuations while controlling risk. “It begins with a quantitative screening process that identifies attractive companies that we should do the fundamental research on,” added Flanagan. That research revolves around three main areas:
The Fund considers a number of factors in weighing when to sell or reduce a position:
As with most investments, mid-cap stocks carry significant risks, such as macro risks, company risks, and competitive risks, according to Flanagan. “However, we typically see the most opportunity when valuation spreads are wide, investors are bearish, and the risks seem high. With a solid process, smart people and patience, those environments can offer significant opportunity to create long-term wealth.”
Active management can help in controlling risk, according to Flanagan. “Active management may have an advantage when stock correlations are low across the market and in an environment where more domestic assets are invested in passive index funds and ETFs. Currently, over 50% of domestic assets are invested in passive funds versus approximately 25% a decade ago.”
Stocks that are not in an index may fly under the radar, providing opportunities for active managers to buy those stocks at a good value relative to the market. “As correlations come down, and passive investments go up, that provides more opportunity for active managers.”
“With valuation spreads wider than normal, prodigious fiscal and monetary stimulus, strong consumer balance sheets, and growing worldwide economies, we see opportunities in the value portion of the market – primarily in financials, industrials and materials,” said Flanagan.
Policies being advocated by the current U.S. administration and other administrations around the world, such as infrastructure, renewable energy and electric vehicles continue to gain prevalence. Flanagan believes that should help boost the cyclical industries, such as industrials and materials, which have a strong presence in the mid-cap universe.
He is also strong on financial companies, which held up better than expected during the pandemic, and were able to keep credit losses below expectations. Among the Fund’s holdings in those areas are:
United Rentals (URI). As the world’s largest equipment rental business, United Rentals should benefit if infrastructure becomes a focus of the new administration.
Western Alliance (WAL). The banking firm has developed a unique business model that has led to solid loan growth, as well as other opportunities in the financial market.
Aptiv (APTV). The auto-parts supplier has a strong foundation in electric and autonomous vehicles.
Nuance Communications (NUAN). This leading healthcare software provider specializes in conversational artificial intelligent platforms.
As the economy and the markets evolve, Flanagan believes the key to continued success is adaptability. “Change is constant. Through my career, the economic and investing landscape has constantly changed. When I was managing a tech fund in the 1990s, I thought I would never see anything crazier than that, and then the financial crisis happened, and now we’re living through a pandemic.
“So, what I’ve learned is that we have to be prepared for everything. We have to be constantly studying and learning, improving our skills, and adapting our strategy when necessary in order to continue to provide consistent, long-term returns.”
Past performance is not necessarily indicative of future results.
All information and representations herein are as of 03/12/2021, unless otherwise noted.
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Thrivent Asset Management, LLC associates. Actual investment decisions made by Thrivent Asset Management, LLC will not necessarily reflect the views expressed. This information should not be considered investment advice or a recommendation of any particular security, strategy or product. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon, and risk tolerance.
This article refers to specific securities which Thrivent Mid-Cap Stock Fund owns. A complete listing of the holdings for the Funds is available on thriventfunds.com
The Refinitiv Lipper Fund Awards, granted annually, highlight funds and fund companies that have excelled in delivering consistently strong risk-adjusted performance relative to their peers.
The Refinitiv Lipper Fund Awards are based on the Lipper Leader for Consistent Return rating, which is a risk-adjusted performance measure calculated over 36, 60 and 120 months. The fund with the highest Lipper Leader for Consistent Return (Effective Return) value in each eligible classification wins the Refinitiv Lipper Fund Award. For more information, see lipperfundawards.com. Although Refinitiv Lipper makes reasonable efforts to ensure the accuracy and reliability of the data contained herein, the accuracy is not guaranteed by Refinitiv Lipper.
Refinitiv Lipper Fund Awards, ©2021 Refinitiv. All rights reserved. Used under license.