Risks of the mid-cap market
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.”
Opportunities in the mid-cap market
“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.”
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