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Don't Be Lulled by Mid-Cap Growth's Recent Strength

Don't Be Lulled by Mid-Cap Growth's Recent Strength

Linda Abu Mushrefova: The strength of the mid-cap growth Morningstar Category in the most recent bull market, following the financial crisis, has resulted in attractive long-term performance for the group despite poor results during the most recent bear market. Over the trailing 15-year time period, through July 31, 2018, the average mid-cap growth fund returned about 10% relative to the average mid-value fund's return of closer to 9%. This includes 2008 where the average mid-cap growth fund declined almost 44% relative to mid-cap value's loss of about 37%.

Investors may tend to focus on recent performance, where growth funds have consistently outperformed their typical value peers. Most recently, the average mid-cap growth fund gained over 18% in the trailing one-year period whereas the average mid-cap value fund was up just 10%. However, the significant drawdown in the most recent bear market illustrates the risk of these strategies. Mid-cap growth funds, on average, will tend to be more volatile than their value counterparts. These higher beta strategies will tend to outperform on the upswing, as seen recently, but lose more in a downturn.

This demonstrates the importance of looking past recent performance. The mid-cap growth category's performance has been impressive as of late, but in the event of a drawdown, it would be prudent for investors to have some value exposure to help mitigate their losses.

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About the Author

Linda Abu Mushrefova

Senior Product Manager, ETF's
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Linda Abu Mushrefova, CFA, is a manager research analyst for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. She covers equity strategies.

Before rejoining Morningstar in 2017, Mushrefova was an analyst on the fixed-income team at Neuberger Berman, covering opportunistic strategies. From 2013-16, she held a variety of roles at Morningstar, including as a product consultant and a data analyst for the firm's open-end and hedge fund databases.

Mushrefova holds a bachelor's degree in economics from Northwestern University. She also holds the Chartered Financial Analyst® designation.

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