Goldilocks learns an investment lesson

Russel Chesler

VanEck Australia

Goldilocks complained when the chair was too big and she complained when it was too small. She complained when the porridge was too hot and she complained when the porridge was too cold. Then there was that incident with the bed. For Goldilocks, the middle was her ‘sweet spot’. While aiming straight down the middle has its advantages, investors sometimes need to be more nimble.

How Goldilocks invested the royalties from selling her three bears encounter is the part of the fairy tale not often told. When Goldilocks buys shares in companies, she insists that the company not be too big and not be too small – the so-called ‘mid-caps’. The ‘mighty mid-caps’ are often referred to as the sweet spot in the investment universe because they combine the attractive attributes of large and small companies.

Some mid-caps can be former small-caps that have grown up. They balance spirit and safety. They have experienced management teams, established brands and client bases, infrastructure already built, and access to capital markets – advantages that small-cap companies may lack.

At the same time, they benefit from flatter management structures, entrepreneurial drive and quick decision-making so can adapt more quickly than their large-cap counterparts.

Mid-caps are not business giants with a huge market share that make it impossible to grow more than a few per cent. Mid-caps still have room to capture market share, offer new products, enter new markets, gain economies of scale or obtain intellectual property quickly. They also have a much greater potential of being taken over than large-caps have. In addition, analysts cover large-caps in such depth there are no hidden gems to find.

The S&P/ASX Index Series defines mid-caps to be the stocks ranked from 51 to 100 by market capitalisation. The following graph shows the mid-cap index outperforming other key indices over the long term.

Below we present this data in a different way. The rolling returns show the performance results over each previous period. In other words, in chart 2 each dot point represents the return for the previous 12 months, in chart 3 each dot represents the returns of the previous 5 years.

What is evident in both is that there are times when the mid-caps underperform the larger-caps. If we focus on chart 2, the last few months are a good case in point. In March this year, mid-caps were the best performing index for the previous 12 months. It was the second highest 12-month performance ever recorded by an S&P/ASX index. Fast forward three months and the mid-cap index is back in-line with the large-caps indices. Price fluctuations tend to be bigger in mid- and small-caps as the below table shows. Referring to the table below, the S&P MidCap 50 has the highest best month and best quarter, but the second lowest worst month and worst quarter.

Goldilocks, like any investor, does not like to lose money, but recognises that timing the market, is impossible.

As with any investment strategy, diversification reduces the risk without, according to Modern Portfolio Theory, giving up too much of the return. Goldilocks is learning that ETFs are useful trading tools for portfolio construction – a lesson almost as important as not stealing, not vandalising furniture and not falling asleep in your victim’s bed.

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VanEck Investments Limited ACN 146 596 116 AFSL 416755 (‘VanEck’) is the responsible entity and issuer of units in the VanEck Vectors Australian Equal Weight ETF (MVW) and VanEck Vectors S&P/ASX MidCap ETF (MVE). This is general advice only, not personal financial advice. It does not take into account any person’s individual objectives, financial situation or needs. Read the PDS and speak with a financial adviser to determine if either fund is appropriate for your circumstances. The PDS is available here. An investment in MVW and MVE carries risks associated with: financial markets generally, individual company management, industry sectors, stock and sector concentration, fund operations and tracking an index. See the PDS for details. No member of the VanEck group of companies guarantees the repayment of capital, the payment of income, performance, or any particular rate of return from any fund. The S&P/ASX MidCap Index (the Index”) is a product of S&P Dow Jones Indices LLC or its affiliates (“SPDJI”) and ASX Limited (“ASX”) and licensed for use by VanEck. S&P® is a registered trademark of Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed by VanEck. The Fund is not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates, or ASX and none of them makes any representation regarding the advisability of investing in the Fund. Such parties do not accept liability for any errors, omissions, or interruptions of the Index and do not give any assurance that the Fund will accurately track the performance of the index or provide positive investment returns. Inclusion of a security within the index or Fund is not a recommendation by any party to buy, sell, or hold such security.

Russel Chesler
Head of Investments and Capital Markets
VanEck Australia

Russel is Head of Investments and Capital Markets at VanEck in Australia. An actuary with over 25 years’ experience in financial services, specialising in asset and wealth management.

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