Christine Benz: Hi, I'm Christine Benz for Morningstar.com. Some investors consider mid-cap stocks to be in the market sweet spot. Joining me to discuss Morningstar's favorite mid-cap blend funds is Russ Kinnel--he's director of fund research for Morningstar.
Russ, thank you so much for being here.
Russ Kinnel: Good to be here.
Benz: Russ, we want to get into some of your specific picks for mid-cap blend funds. But before we do that, let's discuss the case for mid-cap blend stocks and the category in general.
Kinnel: Well, you really get a mix of funds that are there because they have a blend of small, mid, and large. And the funds that have mid-cap in their name are really focusing on that area. Mid-cap companies have some natural appeal because they tend to have a little more seasoned management. They have a little greater product diversity than, say, small cap. On the other hand, they've still got a lot more room to grow. If you buy General Motors (GE) or Microsoft (MSFT), you might wonder how much they can grow from here. You don't have that issue in mid-caps.
Benz: A number of Morningstar's favorite mid-cap blend funds are actually closed to new investors. Should I read anything into that, as a prospective mid-cap investor? Could it mean that the category is a little bit overheated or should I not get too worried about that?
Kinnel: I think it's just a sign that, overall, the U.S. equity market rally is a little long in the tooth, and so we do see closed funds across the board. I don't know that mid-caps are particularly illustrative of that or any worse off than, say, small or large. I just think U.S. equities, in general, have had a very long run.Read Full Transcript
Benz: So, keep that in mind if you're putting your money there.
Kinnel: For sure.
Benz: In terms of funds that are still open that we like in this mid-cap blend category: Ariel Fund (ARGFX) is a Bronze-rated fund that we like. Let's talk about the case for that particular fund.
Kinnel: John Rogers and his team run a Warren Buffet-influenced fund. That means they look for moats and they run a focused portfolio. You'll see, in particular, that they tend to buy boring, steady companies like Jones Lang LaSalle (JLL) and CBRE (CBG)--boring companies that are well established in their industry and just keep plugging along. It's always worth noting the story about '08, which is that the fund got really hammered because it had financials but it also had highly leveraged companies. Even though those companies kept making a profit throughout the recession, they still really got hit hard. So, in the wake of that, Rogers and team have been more balance-sheet-aware and more leverage-aware, in general. The portfolio has done very well since then.
Benz: Another fund that currently earns a Bronze rating is Vanguard Capital Value (VCVLX). It's a very small Vanguard fund. Let's discuss what's going on there and also its strategy, which is sort of a particular strategy--an aggressive-value strategy. It seems like it would require a particular type of investor to use it well.
Kinnel: On the one hand, it's simple. It's the typical Vanguard proposition here: You have a low-cost actively managed fund with good managers from Wellington who only need to do about 25 basis points or so better than the market just to catch up with the index competition. So, in that way, it's simple; but you have two managers running separate sleeves, even though they both work at Wellington. They are both aggressive-contrarian-value investors, and what that means is that you have a fairly bold portfolio, even though there are two managers operating separately. And so performance can kind of be extreme. Peter Higgins, who runs half of it, tends to favor energy and tech--and, of course, that's a fairly potent mix.
Benz: Another fund that we rate highly is First Eagle Fund of America (FEFAX). The A shares are open to new investors. But if you're a no-load, do-it-yourself investor trying to buy the Y shares, those are closed. Let's talk about the case for that fund. We've got it at Silver, but it recently has had some changes at the top.
Kinnel: That's right. Harold Levy remains there. He's been there a long time, but the other comanager spot is in transition from David Cohen to Eric Stone. Eric Stone joined the firm a couple of years ago, but he has about 12 or 13 years of experience in the industry. So, we feel that the process is going to stay the same. And particularly with Levy there, we are still confident that they will execute well. But yes, they are in a transition mode at the fund.
Benz: So, you mentioned three actively managed mid-cap blend funds, but it's also worth noting that the team does like some of the index products that invest in the mid-cap space. Let's talk about those.
Kinnel: If you can't find a good active fund, there are some great passive funds. Vanguard Extended Market (VEXMX) and Vanguard Mid Cap (VIMSX) are great funds. Of course, if you already Vanguard Total Stock Market (VTSMX), you might not need these; but if you don't, these are very good ways to get exposure to the mid-cap area. Extended Market is small- and mid-cap; Mid Cap, obviously, is just mid-cap. But they are great low-cost funds. They're worth a look.
Benz: You mentioned looking at Total Stock Market. If you have that, owning a dedicated mid-cap fund will kind of duplicate that exposure. It sounds like that's probably a good caution to anyone looking at the mid-cap sector--that they should assess their current exposures. They may have adequate exposure there already.
Kinnel: That's right. That's why portfolio tools are great. A fund that's officially large growth might have a lot outside of large growth, and a mid-blend fund might have a lot outside, too. So, you want to put it at all together, look at the sector exposures, look at the market-cap weights, and see where you really need to build exposure before you take the plunge and buy a mid-cap fund.
Benz: Russ, thank you so much for being here to share your insights.
Kinnel: You're welcome.
Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.