Mid-Cap vs Large-Cap Equities

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Choate Investment Advisors divides equities into large-cap, mid-cap and small-cap based on the Standard & Poor’s classification criteria. The S&P 500 represents the largest 500 companies in the US based on market capitalization, the S&P 400 is comprised of the next largest 400 companies after the top 500 and the S&P 600 accounts for the next smaller 600 publicly traded stocks in the US...

Mid-cap stocks outperformed large-caps over a one, three, five, ten and fifteen year period. Despite higher volatility over all periods, the historical 15-year risk-adjusted return for mid-caps has been superior to that of large-caps...

While there is some merit to pay a higher premium for faster growth, we are skeptical about the sustainability of such a large valuation premium. In addition to valuation concerns, mid-cap stocks derive a higher percentage of revenues from domestic US markets while large-cap stocks have considerably more exposure to international developed and emerging markets. High US unemployment will continue to be a headwind for firms with heavy dependence on domestic revenues. Finally, if the US Dollar continues to decline relative to other currencies, firms with a large component of overseas sales will benefit. All of these factors favor large-cap domestic stocks.

Mid-cap stocks have been one of the most compelling risk-adjusted domestic asset classes in recent history... While large-cap stocks have lagged mid-cap stocks over the past fifteen years, we believe the current macroeconomic backdrop bodes well for this asset class.