Mel's Unloved Mid-Caps Finally Getting Some Respect

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Mel's Unloved Mid-Caps Finally Getting Some Respect

Post by Mel Lindauer »

Looks like the investing world is finally realizing what I started saying back in 1999 about mid-caps. Because of my ongoing posts promoting mid-caps, they became known as "Mel's Unloved Mid-Caps".

Better late than never!

http://abcnews.go.com/Business/print?id=23366403

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Re: Mel's Unloved Mid-Caps Finally Getting Some Respect

Post by Mel Lindauer »

From the article:
Over the last 20 years, mid-cap stocks in the S&P 400 have returned 12.4 percent annually, including dividends. That beats the 11.2 percent annual return of the S&P 600 SmallCap index and the 9.5 percent annual return of the large-cap S&P 500 index.
So mid-caps alone have performed better than any combination of slice and dice, something I have argued over the years.
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Re: Mel's Unloved Mid-Caps Finally Getting Some Respect

Post by steve roy »

I'm under-weighted in domestic mid caps -- 20% of the portfolio. Reading your post and looking at the performance charts makes me pause and reflect. Maybe I should re-think my small value tilt a little bit.
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Re: Mel's Unloved Mid-Caps Finally Getting Some Respect

Post by jmndu99 »

Thank you Mel for posting this,

This is where Ramsey gets his 12% in a "good growth mutual fund?
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Re: Mel's Unloved Mid-Caps Finally Getting Some Respect

Post by richard »

steve roy wrote:I'm under-weighted in domestic mid caps -- 20% of the portfolio. Reading your post and looking at the performance charts makes me pause and reflect. Maybe I should re-think my small value tilt a little bit.
Deciding that you need more of something that has gone up recently is not always the best idea.
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Re: Mel's Unloved Mid-Caps Finally Getting Some Respect

Post by Mel Lindauer »

richard wrote:
steve roy wrote:I'm under-weighted in domestic mid caps -- 20% of the portfolio. Reading your post and looking at the performance charts makes me pause and reflect. Maybe I should re-think my small value tilt a little bit.
Deciding that you need more of something that has gone up recently is not always the best idea.
I agree that investors should avoid performance chasing, Richard, but the past 20 years is not really "recently".
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Re: Mel's Unloved Mid-Caps Finally Getting Some Respect

Post by nedsaid »

This is where I have disagreed with the Merriman folks and the "slice and dicers." The mid-cap sector of the stock market is a very profitable sector. My favorite mutual fund company calls it "the sweet spot" of the stock market. I owned a couple of their mid-cap growth funds (they recently merged into one) for years and boy I was glad I did. One of those funds did well and got a lot of recognition for it. The other fund lagged the other but still beat the S&P 500 over time.

Yes, I noticed what Mel noticed years ago. I have invested in the mid-caps for years.

Also people forget that over 50% of the market capitalization of the US Total Stock Market Index is just 100 stocks. So the Total Market is actually a large cap index and a mega cap index at that. Pairing the US Total Market Index with the Extended Market Index (you pick the weightings) is not a bad idea. You get the performance premium and you dilute your concentration in the top 100 stocks!

My target is 40% in mid/small-caps. I am presently at 38%.
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Re: Mel's Unloved Mid-Caps Finally Getting Some Respect

Post by richard »

Mel Lindauer wrote:
richard wrote:
steve roy wrote:I'm under-weighted in domestic mid caps -- 20% of the portfolio. Reading your post and looking at the performance charts makes me pause and reflect. Maybe I should re-think my small value tilt a little bit.
Deciding that you need more of something that has gone up recently is not always the best idea.
I agree that investors should avoid performance chasing, Richard, but the past 20 years is not really "recently".
For believers in a more or less efficient market, investing based on performance charts, even long term charts, is performance chasing. One can hope to be rewarded by taking on more risk, but the danger of taking on more risk is that it's riskier.

20 years? I've long pointed out that with about 100 years of relatively reliable market data, we don't have very many independent data points for a typical 30 to 50 year investment horizon.

Not that I'm a particular fan of small value tilting.
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Re: Mel's Unloved Mid-Caps Finally Getting Some Respect

Post by LadyGeek »

Here's the Morningstar forum thread which started it all: Larry & Mel on "Unloved" Mid-Caps (07-30-2000)

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Re: Mel's Unloved Mid-Caps Finally Getting Some Respect

Post by White Coat Investor »

I have no idea if it will persist, but I didn't know if it would persist in 2006 when I first added a "mid-cap slice" using the TSP S Fund. It has treated me well since then. Using Vanguard funds, extended market has walloped 500 Index by 2.5% a year over the last decade,remained slightly ahead of the small cap index and well ahead of the small cap value index.
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Re: Mel's Unloved Mid-Caps Finally Getting Some Respect

Post by cfs »

Me too

Yes, Mel, I do remember all the unloved Mid-Cap conversations on the old forum. On my boring SWAN portfolio the Mid-Caps have done their job. And now reality check time. On the Vanguard Select Funds, the Mid-Cap index Admiral Shares (VIMAX) is leading the pack on the average 10-year returns. And on the whole Vanguard portfolio, the worst 10-year performing Mid-Cap returned on average over 8% (not bad at all). Danger Will Robinson, is always good to remember the past performance caveat.

Do Great things! And thanks for reading this note.
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Re: Mel's Unloved Mid-Caps Finally Getting Some Respect

Post by sschullo »

EmergDoc wrote: extended market has walloped 500 Index by 2.5% a year over the last decade,remained slightly ahead of the small cap index and well ahead of the small cap value index.
Agree, have most of my Roth in this excellent fund.
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Re: Mel's Unloved Mid-Caps Finally Getting Some Respect

Post by goalie »

Mel,

Because of your pointing out the lack of love for the mid caps and TSM weights so heavily favor the big stocks and almost ignores tomorrow's stars, my portfolio put equal weightings on 500 index, mid cap index, small cap index and REIT.

Your Delco neighbor,
(When you lived here)
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Re: Mel's Unloved Mid-Caps Finally Getting Some Respect

Post by tibbitts »

sschullo wrote:
EmergDoc wrote: extended market has walloped 500 Index by 2.5% a year over the last decade,remained slightly ahead of the small cap index and well ahead of the small cap value index.
Agree, have most of my Roth in this excellent fund.
Some previous posts have suggested that an S&P500 completion index, like VG extended market, is necessarily inferior (over a long enough period, obviously) to a roughly equivalent combination of mid and small index funds. Presumably that's due to the behavior of equities transitioning at the upper end of the index, but probably some experts will be along to comment.
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Re: Mel's Unloved Mid-Caps Finally Getting Some Respect

Post by stlutz »

Some previous posts have suggested that an S&P500 completion index, like VG extended market, is necessarily inferior (over a long enough period, obviously) to a roughly equivalent combination of mid and small index funds. Presumably that's due to the behavior of equities transitioning at the upper end of the index, but probably some experts will be along to comment.
I'm just some guy on the internet as opposed to an "expert", but the extended market index does have one advantages that the others do not have. When a stock is added to the S&P500, its price jumps on the news (because so much index-fund money now has to buy it). When a stock gets dropped, it's price goes down. So, the extended market index gets to do a little buy high and sell low. It sells the stocks that enter the S&P 500 after the price has jumped and buys stocks that get kicked out of the 500 after their price has dropped on the news.
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Re: Mel's Unloved Mid-Caps Finally Getting Some Respect

Post by ResearchMed »

stlutz wrote:
Some previous posts have suggested that an S&P500 completion index, like VG extended market, is necessarily inferior (over a long enough period, obviously) to a roughly equivalent combination of mid and small index funds. Presumably that's due to the behavior of equities transitioning at the upper end of the index, but probably some experts will be along to comment.
I'm just some guy on the internet as opposed to an "expert", but the extended market index does have one advantages that the others do not have. When a stock is added to the S&P500, its price jumps on the news (because so much index-fund money now has to buy it). When a stock gets dropped, it's price goes down. So, the extended market index gets to do a little buy high and sell low. It sells the stocks that enter the S&P 500 after the price has jumped and buys stocks that get kicked out of the 500 after their price has dropped on the news.
Do you mean "sell high and buy low"?
Sounds more like that.

RM
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Re: Mel's Unloved Mid-Caps Finally Getting Some Respect

Post by RyeWhiskey »

Good to hear. If I was still interested in partitioning my equities beyond the Total World Market Index I would feel even better as, when I did feel this way, I held the Mid-Cap Index as my sole domestic equity. :beer
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Re: Mel's Unloved Mid-Caps Finally Getting Some Respect

Post by Kevin M »

As I recall, there was a point a few years ago where long-term bonds had outperformed stocks over the previous 30 years. I don't think most people here believed that meant that long-term bonds would outperform over the following 30 years, or that that was a reason to prefer bonds to stocks.

As I've pointed out before, if you compare the performance and volatility of Vanguard mid-cap and small-cap funds over last 10 years, the difference is negligible, especially if you compare to something like S&P 500. According to Morningstar, growth of $10,000 is $25,695 for mid-cap, $25,488 for small-cap, and $20,299 for 500 Index.

Image

Eyeballing the Morningstar chart back to May 1998 (maximum for the three funds mentioned), it looks like the superior performance of mid-cap over this longer period was primarily due a brief period of outperformance in 2000. Since the beginning of 2001 to now, small-cap has somewhat outperformed mid-cap (31,892 to 30,021), and both have vastly outperformed 500 Index (18,041). Mid-cap also outperformed in 1998, but small-cap had closed most of that gap by early 2000, after which point mid-cap pulled ahead again.

This reminds me of John Bogle's Telltale Chart, (The Telltale Chart June 26, 2002), in which he shows that outperformance of small-cap and value is due primarily to relatively short-periods of outperformance. Although Larry Swedroe has offered a counter-argument to this, it does highlight the period dependency of historical returns. So be careful about relying on 20-year performance data without examining the sub-periods within.

Mid-cap is much, much more like small-cap than it is like large-cap--in terms of returns and risk over the last ten years, as well as in terms of market cap. I would be fine with using an extended-market fund or Vanguard mid-cap index to tilt to small if that were my only choice in a 401k. Similarly, I would be no more comfortable using a mid-cap fund for all of my stock allocation than I would be going 100% small-cap.

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Two long-ago posts . .

Post by Taylor Larimore »

LadyGeek wrote:Here's the Morningstar forum thread which started it all: Larry & Mel on "Unloved" Mid-Caps (07-30-2000)

From the wiki: Index to important posts on Morningstar
LadyGeek:

I used your link to a Conversation that Mel began 14 years ago. I was an admirer of Mel then and now. This was my Reply in that Conversation:
Sun, Jul 30 2000, 4:40 PM | Post #1100376 by Taylor Larimore

Hi Mel & Larry:
I think your idea of a civilized discussion about a specific mutual fund investment topic will be very educational and helpful.

We all know Mel's superb qualifications as evidenced by his outstanding posts. However, many do not know that Larry Swedroe is equally qualified. He has an MBA in Finance and is a principal in the firm of Buckingham Asset Management. He is the author of "The Only Guide To A Winning Investment Strategy You'll Ever Need". It sits by my computer.

Go to it guys. The rest of us will add input if we can. Together, we can all learn (in a non-argumentative way) how to invest a little better.
Best wishes.
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Re: Mel's Unloved Mid-Caps Finally Getting Some Respect

Post by scone »

Just for giggles, I looked at my equity funds using the Fidelity GPS software. All nine funds, whether large, small, foreign, or domestic, had some mid-cap money in there. Is it possible that mid-caps are doing well because they are catching a bid all over the place, as it were?
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Re: Mel's Unloved Mid-Caps Finally Getting Some Respect

Post by JoMoney »

I don't mean to hate on the mid-caps, it was a great call, and if "quality" is indeed a "factor" along with size, then mid-caps would seem to be a sweet-spot between small and quality... but I still have a bit of a problem getting overly excited about mid-caps or small-caps going forward. A lot of the performance coming off of the peaks of 2000 was related to how over-priced the large-cap sector was. P/E's on the largest of the large-caps were far exceeding everything towards the bottom end of the market. There were other assets one could have owned that served as a good shelter from the dot-com bubble. Image
Over the past decade, if looking at P/E's and the price that market participants are paying for smaller stocks, things have pretty much flipped around, and they seem to be paying more for the earnings of these smaller companies
Vanguard Mid-Cap Index Fund Investor Shares (VIMSX) Price/earnings ratio 24.1x
Vanguard 500 Index Fund Investor Shares (VFINX) Price/earnings ratio 18.6x

I don't want to diminish what a great call it was back then, but I am suggesting people consider what it could mean going forward Image
richard wrote: ...
Deciding that you need more of something that has gone up recently is not always the best idea.
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Re: Mel's Unloved Mid-Caps Finally Getting Some Respect

Post by berntson »

Earlier today, I used Morningstar's forward-looking valuations to compare the valuations for large value, mid cap value, and small cap value. I estimate that mid cap value and small cap value are about 15% more expensive than large cap value (using the average of p/e, p/c, p/b, and p/s). Assuming that valuations mean revert over the next ten years, this means that mid cap value and small cap value should underperform large cap value by about -1.5%.

On the other hand, if we expect small cap and mid cap to benefit from the historic premium for smaller stocks, we should add back maybe .5% a year for mid caps and 1% for small caps. A further complication is that small value typically has a stronger value loading than large cap value or mid cap value. This increases the expected returns by a perhaps another .5%. So it is reasonable to expect small value and large value have roughly equal returns over the next decade, given current valuations, with mid cap value trailing by around 1% a year.

Of course, these are just estimates (i.e. expectations values). Future returns will always be wildly unpredictable.
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Re: Mel's Unloved Mid-Caps Finally Getting Some Respect

Post by gwrvmd »

Another indication that midcaps have done comparatively well in the past 10 years, especially in the past 5 years, is that the S&P 500
equally weighed has significantly beaten the regular S&P 500 which is capitalization weighed.
Average Annual Total Return 5 years: S&P 500 Cap weighed 17.9
S&P 500 Equal Weighed 22.68
The regular cap weighed S&P 500 is a large cap index with a mid cap tilt, the equally weighed S&P 500 is a mid cap index with a large cap tilt........Gordon
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Re: Mel's Unloved Mid-Caps Finally Getting Some Respect

Post by Mel Lindauer »

Hi Kevin:

What you failed to take into consideration is that when I first did my study in 1999 (based on M*'s Principia Pro data), I found that mid caps had already outperformed for the previous 15 year period. So that time period had nothing to do with the mid caps 2000 outperformance you mentioned. Fast forward to today, and we're now talking about almost 30 years of oupterformance. That 30-year time period would be meaningful to a lot of investors.

I'm wondering just how long it will take before "Mel's Unloved Mid-Caps" get the respect they seem to have earned?


Kevin M wrote:As I recall, there was a point a few years ago where long-term bonds had outperformed stocks over the previous 30 years. I don't think most people here believed that meant that long-term bonds would outperform over the following 30 years, or that that was a reason to prefer bonds to stocks.

As I've pointed out before, if you compare the performance and volatility of Vanguard mid-cap and small-cap funds over last 10 years, the difference is negligible, especially if you compare to something like S&P 500. According to Morningstar, growth of $10,000 is $25,695 for mid-cap, $25,488 for small-cap, and $20,299 for 500 Index.

Image

Eyeballing the Morningstar chart back to May 1998 (maximum for the three funds mentioned), it looks like the superior performance of mid-cap over this longer period was primarily due a brief period of outperformance in 2000. Since the beginning of 2001 to now, small-cap has somewhat outperformed mid-cap (31,892 to 30,021), and both have vastly outperformed 500 Index (18,041). Mid-cap also outperformed in 1998, but small-cap had closed most of that gap by early 2000, after which point mid-cap pulled ahead again.

This reminds me of John Bogle's Telltale Chart, (The Telltale Chart June 26, 2002), in which he shows that outperformance of small-cap and value is due primarily to relatively short-periods of outperformance. Although Larry Swedroe has offered a counter-argument to this, it does highlight the period dependency of historical returns. So be careful about relying on 20-year performance data without examining the sub-periods within.

Mid-cap is much, much more like small-cap than it is like large-cap--in terms of returns and risk over the last ten years, as well as in terms of market cap. I would be fine with using an extended-market fund or Vanguard mid-cap index to tilt to small if that were my only choice in a 401k. Similarly, I would be no more comfortable using a mid-cap fund for all of my stock allocation than I would be going 100% small-cap.

Kevin
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Re: Mel's Unloved Mid-Caps Finally Getting Some Respect

Post by Kevin M »

The article talks about the last 20 years, not the 15 years before 1999. I looked at the last 16 years because what one can do with the Vanguard funds. One of the main points of my post is that it's important to look at how relatively short spurts of outperformance can result in outperformance over certain longer time-periods, as is true for all the major stock categories. This was one of the main points of John Bogles Telltale Chart presentation, which applies to mid-caps just as much as it does to the other stock categories examined.

Why are the 15 years prior to 1999 more relevant than the 13 years prior to now, during which Vanguard small-cap fund has outperformed the mid-cap fund by a bit, but other than that, the funds have performed very similarly? Since its inception in 1998, the Vanguard Mid-Cap fund has been a decent substitute for the Vanguard small-cap fund. I'd be OK owning either one to tilt to small-cap, but not holding all equities in either one.

What I find most interesting is the lock-step performance of mid-cap and small-cap over many time periods, including the last decade, but the divergence of mid-cap over certain short periods, such as in 2000. What's that about? Can't say it was that mid-cap holds up better in bear markets, since it didn't in 2008/2009 (unless you consider a 53% loss vs. a 54% loss significant).

Why don't long-term bonds get the respect they deserve after having outperformed stocks over a 30-year period? Say What? In 30-Year Race, Bonds Beat Stocks - Bloomberg

How about we throw REITs into the mix? Vanguard REIT fund (46,672)) has outperformed small-cap (38,792) and mid-cap (42,038) over the last 15 years, despite having dropped most sharply in 2008/2009 (after doing quite will in the bear of the early 2000s). Of course they've all blown away the S&P 500 (18,628) over that period.

Image

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Re: Mel's Unloved Mid-Caps Finally Getting Some Respect

Post by jmndu99 »

With this new news (or old, now) I can only guess that many will be jumping into the mid cap funds.
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Re: Mel's Unloved Mid-Caps Finally Getting Some Respect

Post by Mel Lindauer »

jmndu99 wrote:With this new news (or old, now) I can only guess that many will be jumping into the mid cap funds.
Like your avatar, jmndu99.

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Re: Mel's Unloved Mid-Caps Finally Getting Some Respect

Post by ResearchMed »

The *only* truly helpful thing (looking in retrospect, and also somewhat at the time) that our former MegaBrokers at MegaBrokerage A-then B did was to draw our attention to mid-caps.
For this, we thank them, not that they would know, having been "out of our lives" for quite some time now.
(It was getting fed up with them, and also some nonsense from TIAA-CREF, that led me to start serious research on my own, and that led us to Bogleheads, and lots of opinions of various sorts, and generally a wealth of information and feedback. Thanks!)

After researching this at great length, and over several years (and on an ongoing basis), we had some of our best returns in funds in this area.

We also used one particular non-Vanguard fund recommended by a certain newsletter writer (usually not looked upon favorably here in BogleheadLand), and that has probably been one of our single most profitable investment since then. (That's percentage-wise increase, not in absolute dollars, alas...)

RM
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Re: Mel's Unloved Mid-Caps Finally Getting Some Respect

Post by traveler90 »

As a young investor, I do want to begin tilting towards small/mid caps more within my Roth IRA. To me it looks like there are three good funds for this:

Vanguard Mid Cap Index
Vanguard Small Cap Index
Vanguard Extended Market

My issue with the Mid Cap fund, is it doesn't include any small caps, whereas the Ext. market and small cap funds include BOTH.

Is there really any reason to hold the Mid Cap Index fund? Small Cap Index seems like the best to get both of these in.
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Re: Mel's Unloved Mid-Caps Finally Getting Some Respect

Post by Mel Lindauer »

My comments were (and are) aimed primarily at the slice-and-dice crowd, and had nothing to do with REITS or LT Bonds. In fact, my 2000 exchange on M* with my good friend, Larry Swedroe (a proponent of S&D), was that mid-caps alone might be a better choice for investors than any combination of large and small, and that turned out to be correct.
Kevin M wrote:The article talks about the last 20 years, not the 15 years before 1999. I looked at the last 16 years because what one can do with the Vanguard funds. One of the main points of my post is that it's important to look at how relatively short spurts of outperformance can result in outperformance over certain longer time-periods, as is true for all the major stock categories. This was one of the main points of John Bogles Telltale Chart presentation, which applies to mid-caps just as much as it does to the other stock categories examined.

Why are the 15 years prior to 1999 more relevant than the 13 years prior to now, during which Vanguard small-cap fund has outperformed the mid-cap fund by a bit, but other than that, the funds have performed very similarly? Since its inception in 1998, the Vanguard Mid-Cap fund has been a decent substitute for the Vanguard small-cap fund. I'd be OK owning either one to tilt to small-cap, but not holding all equities in either one.

What I find most interesting is the lock-step performance of mid-cap and small-cap over many time periods, including the last decade, but the divergence of mid-cap over certain short periods, such as in 2000. What's that about? Can't say it was that mid-cap holds up better in bear markets, since it didn't in 2008/2009 (unless you consider a 53% loss vs. a 54% loss significant).

Why don't long-term bonds get the respect they deserve after having outperformed stocks over a 30-year period? Say What? In 30-Year Race, Bonds Beat Stocks - Bloomberg

How about we throw REITs into the mix? Vanguard REIT fund (46,672)) has outperformed small-cap (38,792) and mid-cap (42,038) over the last 15 years, despite having dropped most sharply in 2008/2009 (after doing quite will in the bear of the early 2000s). Of course they've all blown away the S&P 500 (18,628) over that period.

Image

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Re: Mel's Unloved Mid-Caps Finally Getting Some Respect

Post by Kevin M »

Mel Lindauer wrote:My comments were (and are) aimed primarily at the slice-and-dice crowd, and had nothing to do with REITS or LT Bonds. In fact, my 2000 exchange on M* with my good friend, Larry Swedroe (a proponent of S&D), was that mid-caps alone might be a better choice for investors than any combination of large and small, and that turned out to be correct.
Mel, you are really not addressing my points. A major point is that you are basing your contention about superior long-term performance based on a few relatively short periods of outperformance, at least since 1998. The results are highly period dependent.

Someone who saw your 2000 discussion, and as a result invested in the Vanguard mid-cap fund on Jan 1, 2001 has gotten slightly lower returns than someone who invested in the Vanguard small-cap fund on the same date. They also experienced almost identical volatility. So no, mid-cap was not a better choice than any combination of large-cap and small-cap in the last 13 years. In terms of performance, small-cap was better. In terms of risk-management, a combination of large-cap and small-cap probably was better.

The bond and REIT examples were just to illustrate the period dependency of claims like this. I just don't think it's wise to base decisions solely on any past period of performance, especially without looking at the sub-periods within.

It doesn't take more than looking at the charts I've shared to see that the Vanguard mid-cap fund is just about as risky as the Vanguard small-cap fund. The performance and risk of the mid-cap fund is not some middle-of-the-road choice between large-cap and small-cap--it is much, much more like small-cap in terms of performance and risk. This is why I repeat that putting all of one's equity into mid-cap is a very risky proposition, just as is putting all of one's equity into small-cap. One should not do either without a full awareness of the risks involved.

Kevin
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Re: Mel's Unloved Mid-Caps Finally Getting Some Respect

Post by Steady »

hmm MEL, which mid cap do you like most, value, growth or blend? or extended market
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Re: Mel's Unloved Mid-Caps Finally Getting Some Respect

Post by Cosmo »

Mel Lindauer wrote:Looks like the investing world is finally realizing what I started saying back in 1999 about mid-caps. Because of my ongoing posts promoting mid-caps, they became known as "Mel's Unloved Mid-Caps".

Better late than never!

http://abcnews.go.com/Business/print?id=23366403

Happy Easter!
I am the proud owner of Mel's Unloved Mid-Caps as I have owned Vanguard Total Stock Market Index (VTSAX) since 2000. Over this time, I have seen many small companies "graduate" to this mid-cap space and I have also seen some of these "loved" mid caps advance to large company giants (APPL) and I couldn't be happier.

Regards,
Cosmo
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Re: Mel's Unloved Mid-Caps Finally Getting Some Respect

Post by ray.james »

Kevin M wrote:
Mel Lindauer wrote:My comments were (and are) aimed primarily at the slice-and-dice crowd, and had nothing to do with REITS or LT Bonds. In fact, my 2000 exchange on M* with my good friend, Larry Swedroe (a proponent of S&D), was that mid-caps alone might be a better choice for investors than any combination of large and small, and that turned out to be correct.
Mel, you are really not addressing my points. A major point is that you are basing your contention about superior long-term performance based on a few relatively short periods of outperformance, at least since 1998. The results are highly period dependent.

Someone who saw your 2000 discussion, and as a result invested in the Vanguard mid-cap fund on Jan 1, 2001 has gotten slightly lower returns than someone who invested in the Vanguard small-cap fund on the same date. They also experienced almost identical volatility. So no, mid-cap was not a better choice than any combination of large-cap and small-cap in the last 13 years. In terms of performance, small-cap was better. In terms of risk-management, a combination of large-cap and small-cap probably was better.

The bond and REIT examples were just to illustrate the period dependency of claims like this. I just don't think it's wise to base decisions solely on any past period of performance, especially without looking at the sub-periods within.

It doesn't take more than looking at the charts I've shared to see that the Vanguard mid-cap fund is just about as risky as the Vanguard small-cap fund. The performance and risk of the mid-cap fund is not some middle-of-the-road choice between large-cap and small-cap--it is much, much more like small-cap in terms of performance and risk. This is why I repeat that putting all of one's equity into mid-cap is a very risky proposition, just as is putting all of one's equity into small-cap. One should not do either without a full awareness of the risks involved.

Kevin
one of the reason for the midcaps resilience during 2000 is their sector overload on Industrials & consumer cyclical. As against 16% in TSM, they are 21% at one point 23% during 2000. When the internet bubble burst people ran away from tech and this helped Midcaps to gain the lead.

Also, historically midcaps have lower financials against S&P 500(15-18 VS 10) which helped them during S&L crisis and 2008 financial meltdown.

Lower sector dependence on energy which impacts inflation, dollar value of the companies earnings compounded with mild tilt to utilities & defensive sector provided the additional glue. I don't remember, if its Dr. Bernstein /Larry/Rick posting an article going deep in to the reasons and analyzing this.

One thing for sure is...Non one can know if a investor risk is more marginalized; if it is spread out using market capitalization or sector balance :happy
When in doubt, http://www.bogleheads.org/forum/viewtopic.php?f=1&t=79939
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Re: Mel's Unloved Mid-Caps Finally Getting Some Respect

Post by Kevin M »

ray.james wrote: one of the reason for the midcaps resilience during 2000 is their sector overload on Industrials & consumer cyclical. As against 16% in TSM, they are 21% at one point 23% during 2000. When the internet bubble burst people ran away from tech and this helped Midcaps to gain the lead.
I don't know if this explains it or not, but if it wasn't this, it seems to me that there had to be something along these lines going on during the short time that mid-caps pulled ahead in 2000. Whatever it was seems not to have been a factor since 2001.
ray.james wrote:Also, historically midcaps have lower financials against S&P 500(15-18 VS 10) which helped them during S&L crisis and 2008 financial meltdown.
But that didn't help during the 2008/2009 crisis. You can play with the exact dates to make small-cap or mid-cap look worse, but from 6/4/2008 through 11/20/2008, Vanguard mid-cap declined more than small-cap and 500 index.

Image

And small-cap has stayed ahead of mid-cap ever since (as both have pulled way ahead of S&P 500).

But I think the more important point is that Vanguard small-cap and mid-cap funds have performed like twin siblings over the last 13 years compared to S&P 500.

Image

Using either small-cap or mid-cap fund to tilt toward small-cap would have paid off handsomely over this period.

But maybe the mean reversion John Bogle discusses in The Telltale Chart will kick in, and S&P 500 will outperform over the next 13 years. Or maybe we'll have another one year period when mid-cap outperforms. One thing I would bet on is that the performance and risk of small-cap and mid-cap will be much more similar to each other than either one will be to S&P 500.

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Re: Mel's Unloved Mid-Caps Finally Getting Some Respect

Post by White Coat Investor »

tibbitts wrote:
sschullo wrote:
EmergDoc wrote: extended market has walloped 500 Index by 2.5% a year over the last decade,remained slightly ahead of the small cap index and well ahead of the small cap value index.
Agree, have most of my Roth in this excellent fund.
Some previous posts have suggested that an S&P500 completion index, like VG extended market, is necessarily inferior (over a long enough period, obviously) to a roughly equivalent combination of mid and small index funds. Presumably that's due to the behavior of equities transitioning at the upper end of the index, but probably some experts will be along to comment.
That's great, but there's no midcap index in the TSP (nor smallcap index). So you take what you can get, and build your portfolio around it.
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Re: Mel's Unloved Mid-Caps Finally Getting Some Respect

Post by traveler90 »

traveler90 wrote:As a young investor, I do want to begin tilting towards small/mid caps more within my Roth IRA. To me it looks like there are three good funds for this:

Vanguard Mid Cap Index
Vanguard Small Cap Index
Vanguard Extended Market

My issue with the Mid Cap fund, is it doesn't include any small caps, whereas the Ext. market and small cap funds include BOTH.

Is there really any reason to hold the Mid Cap Index fund? Small Cap Index seems like the best to get both of these in.
Anything?
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Re: Mel's Unloved Mid-Caps Finally Getting Some Respect

Post by The Wizard »

traveler90 wrote:
traveler90 wrote:As a young investor, I do want to begin tilting towards small/mid caps more within my Roth IRA. To me it looks like there are three good funds for this:

Vanguard Mid Cap Index
Vanguard Small Cap Index
Vanguard Extended Market

My issue with the Mid Cap fund, is it doesn't include any small caps, whereas the Ext. market and small cap funds include BOTH.

Is there really any reason to hold the Mid Cap Index fund? Small Cap Index seems like the best to get both of these in.
Anything?
The Extended Market index fund is a fine choice, yes.
You can get more volatility in the small cap funds, if that's what you're after.
Go ahead and plot the three funds you mention over at M* and let's see what we can learn about this...
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Re: Mel's Unloved Mid-Caps Finally Getting Some Respect

Post by berntson »

traveler90 wrote:
traveler90 wrote:As a young investor, I do want to begin tilting towards small/mid caps more within my Roth IRA. To me it looks like there are three good funds for this:

Vanguard Mid Cap Index
Vanguard Small Cap Index
Vanguard Extended Market

My issue with the Mid Cap fund, is it doesn't include any small caps, whereas the Ext. market and small cap funds include BOTH.

Is there really any reason to hold the Mid Cap Index fund? Small Cap Index seems like the best to get both of these in.
Anything?
It depends on how much of a size tilt you want for your portfolio. Suppose you want a moderate size tilt for your portfolio. One way to do it is to hold some extended market and some total market. Another way to do it is to replace the extended market allocation with a smaller small cap allocation, and then hold more total market. I would lean towards the former options mostly because it has wider diversification. I like spreading my eggs out as much as possible.

There's nothing magical about mid cap funds. In the long run, we should expect them to behave like an appropriate mix of large cap and small cap stocks. On the other hand, there's nothing magical about splitting your allocation between large cap and small cap stocks. In the long run, a split allocation will behave like a mid cap fund. The two strategies are completely equivalent.
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Re: Mel's Unloved Mid-Caps Finally Getting Some Respect

Post by Kevin M »

berntson wrote: There's nothing magical about mid cap funds. In the long run, we should expect them to behave like an appropriate mix of large cap and small cap stocks.
Although that is an intuitive conclusion based on fund names, it is not born out by the data--at least not if you look at Morningstar growth charts for Vanguard funds since the inception of the Vanguard mid-cap fund on 5/21/1998.

In the almost 16 years since then, the mid-cap fund has outperformed small-cap, which has outperformed large-cap as represented by Vanguard 500 Index. During that period, extended-market trailed small-cap slightly, but would have been a decent substitute.

Image

Was mid-cap between small and large during the longest period all four funds existed? Nope. It did better than both (although extended market was between small and large)! But as I've pointed out, the mid-cap advantage over small-cap was due mostly to a short period (about five months) of outperformance in 2000.

Image

Note that during this short period mid-cap tracked 500 index quite closely, so this short period of mid-cap outperformance seems mostly linked to outperformance of large-cap. Also note that during this period extended market closely tracked small-cap, but slightly underperformed it.

Mid-cap outperformed small-cap in 1998, but most of that gap was closed on 2/29/2000:

Image

Both mid-cap and extended market were somewhere between small and large much of that time period, but for whatever reason, extended market ended up outperforming the other three funds here.

From 8/3/2000 through 4/22/2014, small-cap has outperformed mid-cap by a smidge, but you could have used either one to balance a large-cap fund like Vanguard 500 Index to get very similar results. During that period, extended market didn't give you as much of the small-cap outperformance.

Image

Did mid-cap perform like a blend of large and small? Nope, it performed much like small-cap. Although, extended market appears to have performed more like a blend of small and large during this period, if you make the start date just five months later (1/1/2001), it appears to track small-cap much more closely:

Image

Hopefully these charts show that these funds don't always perform as one might expect based on the names, and that the relative performance is highly period dependent. For most of the time, there is little difference between the performance of small-cap, mid-cap, and extended market, but there are relatively short periods during which one or the other deviates somewhat, making it look better or worse over selected longer term periods.

Kevin
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Re: Mel's Unloved Mid-Caps Finally Getting Some Respect

Post by The Wizard »

Good job with the graphs, Kevin.
Between you & Nisi, we're covered...
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Re: Mel's Unloved Mid-Caps Finally Getting Some Respect

Post by steve r »

Trev on the old diehards site backtested midcaps to the 1920s ... I could find that link, but here is some of the findings. Mid caps consistent outperform a barbell approach of L and S

http://www.bogleheads.org/forum/viewtopic.php?t=1997
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Re: Mel's Unloved Mid-Caps Finally Getting Some Respect

Post by Kevin M »

Earlier I noted that mid-cap was much closer to small-cap (than large-cap) in terms of market capitalization. The only market cap number that Vanguard publishes (that I can find) is median market cap (according to prospectus, this is weighted by assets held by the fund). Here are the current values for selected funds (in $ billions):

Code: Select all

Fund                Mkt Cap ($B)
-----------------  ------------
500 Index           66.0
Large cap           61.5
Total stock         45.1
Mid-cap             10.0
Extended mkt         3.9
Small cap            3.1
Note that mid-cap median market cap is about $7B more than small-cap, but $56B less than 500 Index. Is it surprising then that mid-cap tracks small-cap much more closely than it does large-cap (most of the time), and does not perform somewhere between the two most of the time?

Based on market cap, extended market should track small-cap even more closely, and it often does, but not always. You can see in one of the graphs I posted above that in the early 2000s, extended-market tracked 500 Index more closely, while mid-cap tracked small-cap more closely; another one of those apparent anomalies that seems to occur with these "mid-cap" funds from time to time.

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Re: Mel's Unloved Mid-Caps Finally Getting Some Respect

Post by JoMoney »

One thing to note, is that Vanguard's "Mid Cap" Index changed indexes over time. Once upon a time it tracked the S&P400 Mid-Cap Index which has a much smaller average market cap According to Morningstar:
Vanguard S&P Mid-Cap 400 Index ETF IVOO - Avg Market Cap USD: 4,639 Mil
Vanguard Mid-Cap ETF VO - Avg Market Cap USD: 10,098 Mil

Comparing today's Vanguard Mid-Cap index (VO) to how that fund performed earlier in the 2000's may not be a good representation.
Kevin M wrote:...extended market should track small-cap even more closely, and it often does, but not always. You can see in one of the graphs I posted above that in the early 2000s, extended-market tracked 500 Index more closely, while mid-cap tracked small-cap more closely; another one of those apparent anomalies that seems to occur with these "mid-cap" funds from time to time...
I think it depends on what small-caps you're looking at. There is tremendous room for different variations among small-caps, there's just so many more of them...
Image

...also note that it's really hard to say what the "Extended Index" had as it's market-cap in this time frame. The "Extended Index" doesn't track in particular market cap, it's a completion index that owns everything that's not in the S&P500 , from time to time there could be quite a few large or even mega-cap stocks in the index that are their because they do not meet the criteria for inclusion in the S&P500. I can imagine quite a few of those types of companies during the dot-com bubble where earnings didn't matter because "this time was different" (4 quarters of positive reported earnings are among the criteria for inclusion in the S&P 500).
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Re: Mel's Unloved Mid-Caps Finally Getting Some Respect

Post by Kevin M »

^All good points JoMoney.

Similarly, one cannot invest in an average of all mid-cap funds, which I believe is the data that was used in some of the earlier analysis (before Vanguard even had a mid-cap fund).

I just use Vanguard funds when comparing, since I believe there will be more consistency this way, and it will be more useful to a typical Boglehead who I would guess would be likely to use Vanguard funds if given a choice. But no matter which mid-cap fund one is considering, I would look carefully at things like market cap and correlation to small-cap before assuming that it will behave something like a blend of large-cap and small-cap.

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Re: Mel's Unloved Mid-Caps Finally Getting Some Respect

Post by btraven »

I kind of remember that the current Primecap fund started out as a midcap fund. Is that true?
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Re: Mel's Unloved Mid-Caps Finally Getting Some Respect

Post by JoMoney »

btraven wrote:I kind of remember that the current Primecap fund started out as a midcap fund. Is that true?
It's an actively managed fund that includes both large and mid-cap. I'm pretty sure their style drifts at different times based on what companies the managers are focused on. They use several managers that are focussed on individual companies/stocks, I don't think they're focused on cap-size specificly, but more on the value and growth that they think they're going to find in the individual companies they select.

How you define what is "mid-cap" is a gray area... CRSP defines it one way, the S&P mid-cap fund is a bit different, someone else may define it differently.
Mid-caps certainly aren't the $60billion+ mega caps, and they aren't the micro-caps... other than that I think you'll find quite a bit of wiggle room on how you define what a mid-cap is.

Annual reports for the fund going back to 2003 are available online from the SEC EDGAR database. Vanguard's annual reports typically include excellent details about their funds portfolio characteristics.
Back in August 2003, the annual report shows:
PRIMECAP Median Market Cap =$15.5B

For comparison, at the same time frame (around June 2003):
Small-Cap Index Fund Median Market Cap=$1.0B
Mid-Cap Index Fund Median Market Cap=$3.8B
Total Stock Market Median Market Cap=$27.7B
S&P 500 Median Market Cap=$50.4B

To me, I would consider just about any individual stock below the average market-cap of the S&P500 to potentially be called a mid-cap. It looks like the common definition is $2-$10 Billion.

Today, PRIMECAP's market-cap is:
Median market cap=$62.9 billion

And the S&P 500 is:
Median market cap=$66.0 billion

...in that light, I would say they used to be more of a mid-cap fund in the early 2000's, and they're more of a large-cap fund now.
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Re: Mel's Unloved Mid-Caps Finally Getting Some Respect

Post by oldzey »

Mel Lindauer wrote: Sun Apr 20, 2014 9:43 am Looks like the investing world is finally realizing what I started saying back in 1999 about mid-caps. Because of my ongoing posts promoting mid-caps, they became known as "Mel's Unloved Mid-Caps".

Better late than never!

http://abcnews.go.com/Business/print?id=23366403

Happy Easter!
Here's an archived link to the original post from 2014 quoted above: https://web.archive.org/web/20140418083 ... d=23366403

Note: edited to add bold/red emphasis about OP.
Last edited by oldzey on Sat Nov 02, 2019 12:00 pm, edited 1 time in total.
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Re: Mel's Unloved Mid-Caps Finally Getting Some Respect

Post by Culbretd »

Love Mels Unloved Midcaps. I have 50% of my U.S. equities in mid caps and the other 50% in the S&P 500. I use the S&P 400 and the CRSP mid cap index in my wifes TIAA 401(a) account. I’ve been very pleased with the performance of midcaps.

I see they still don’t get the respect they deserve though but that’s ok. Still gonna hold them. Researching Mel’s threads over the years I was surprised to see that Mel has had several good calls over the past couple of decades; not just touting mid caps but other asset classes.

Certainly glad yo are a poster here on Bogleheads.org Mel. Some of us pay close attention when we see your post.
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Re: Mel's Unloved Mid-Caps Finally Getting Some Respect

Post by snailderby »

Has anyone seen SPDR's recent marketing touting midcaps? https://us.spdrs.com/en/investment-idea ... aris_sep19.
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