The case for a dedicated exposure to global mid caps

This paper sets out a detailed rationale for investing in global mid-cap equity. We believe that this asset class has been under-appreciated in the past, but offers some excellent opportunities for investors looking for exposure to global equity markets.

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Global mid-cap equity offers exposure to the broad global equity asset class, but also offers the opportunity for superior returns, and superior risk adjusted returns, compared to global large cap equity. And despite some misconceptions about their risk profile, they are, on average, larger, more liquid, with lower trading costs than the Australian large-cap universe.

The global large cap investing universe is heavily influenced by a small number of mega-cap names, many of them in the Tech sector, who have driven performance of the market index for a number of years. By contrast the global mid cap universe of stocks is far more diverse at stock level with no single names, or groups of names, driving performance on  the market. This diversity of opportunity is a far more desirable investment characteristic than a top-heavy concentrated market where the risk of getting the key names wrong can have an undue bearing on performance success in global large caps. With significantly lower analyst coverage of stocks in the mid-cap universe compared to large caps there are excellent opportunities to add value by rigorous bottom-up research and active management in this asset class.

One argument often advanced for not using a separate mid-cap manager is that many large cap global equity managers already have a mid-cap exposure; whilst this is generally true, we have established that large cap managers have on average detracted value from their portfolio performance with their mid-cap exposure – attribution analysis has shown that, on average, large cap managers have subtracted relative value with their exposure to global mid-caps. This is not surprising, as most global large cap equity managers will focus the majority of their effort on their large cap names rather than their mid-cap exposures.

There is also a significant case from a portfolio construction perspective that global mid-caps offer an excellent complementary exposure to a global large cap equity portfolio. In particular, the diversifying sector and size characteristics of global mid-cap equity give the opportunity for superior performance and risk outcomes at a portfolio level.

Fidelity’s Global Future Leaders Fund offers a compelling opportunity for exposure to the global mid‑cap equity asset class. Since its creation in September 2020, this Fund is leading peers in the global mid cap equity space from performance and risk-adjusted performance perspectives. 

Of the peers available in Australia, Fidelity is fortunate in being able to utilise a truly global research platform, with a very deep pool of equity analysts and ESG insights. Combined with skilled and experienced portfolio managers, the Fidelity Global Future Leaders Fund is able to offer exposure to this asset class. 

Environmental, social and governance factors are increasingly important in the management of portfolios. Fidelity has considerable expertise in these areas and the investment process has deeply embedded these considerations in the management of the portfolio.