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Mid-cap or madcap?

The mid-cap and small-cap sectors suffered last year in a sharp sell-off as fund managers with the remit to do so switched to large caps in an attempt to defend assets.

A number of well known names to fall into that strategy include New Star UK alpha fund manager Tim Steer – soon to be Artemis-bound – who has had to go against his principles to defend assets due to fears about companies at the smaller end going bust.

However, given the fall in the FTSE 250 index – standing at 5,941 on March 5 – is now the time to make a move back into the market?

Neptune clearly believes there is value. At the end of 2008, the firm launched its own mid-cap fund under the management of Mark Martin. The fund will invest in the FTSE 250 and in the 50 biggest companies by market capitalisation listed on the FTSE small-cap index.

Hargreaves Lansdown head of research Mark Dampier says: “The 250 has halved in the past 12 months but I can understand the logic of such a launch as Neptune may well feel the market is set to bottom out and they have a very strong fund range in the UK so advisers may well look to it as an opportunity.”

Perhaps the best-known mid-cap manager is Schroders’ Andy Brough who has been running the company’s £1.2bn mid 250 fund since November 1999 and says although the outlook for UK companies is undoubtedly tough, the key is picking stocks that are fundamentally strong and that have the ability to trade in difficult market situations.

He says: “We believe we have already started to see some signs that the financial strength within the portfolio is being recognised by the wider market and we are confident that the qualities of our holdings should continue to be acknowledged in the face of the still widespread fear about bankruptcy and debt.

“Moreover, we believe those holdings that have decent order books and solid yields – notably Carillion, Atkins, Babcock International – should prove increasingly attractive in the absence of dividend income from the banks.

“We also continue to look out for new opportunities amid the capital-raisings and numerous consituent changes but our focus remains heavily on those firms with strong management teams, robust business models and solid long-term prospects.”

Old Mutual UK select mid-cap fund manager Richard Watts says the aggressive sell-off last autumn savaged the market.

He says: “It left the mid-cap market at seven times valuation earnings, which is now consistent with recession markets. However, we are now looking at defensive growth stocks as opposed to pure defensives, so we are looking at the likes of support services and areospace.”

Chelsea Financial Services managing director Darius McDermott says: “Mid-caps tend to be focused on domestic earnings and we are in a serious domestic recession but I would expect there is some relief overseas. However, the sell-off has made them cheap, the big question with them is, will they get cheaper? They will have a place in a balanced portfolio.”


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