Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 276

Changing landscape of US large and mid caps

Historically, an allocation to the US large cap growth category of the equity asset class, as represented by the Russell 1000® Growth Index, has presented investors with a reasonable opportunity to gain exposure to mid cap stocks. For this analysis, we define US mid caps as companies with a market capitalisation between $2 billion and $25 billion1. The advantage of this inefficiency within the asset class is that it may help to diversify a portfolio, at least from a market capitalisation standpoint. However, due primarily to the strong performance of a handful of technology stocks (and their ensuing increase in market capitalisation) within the Russell 1000® Growth Index, today’s large-cap growth investor may be less able to gain mid cap exposure through the traditional large cap growth allocation (as shown in Exhibit 1).

The increasing dominance of large caps

In our view, the dominance of the most influential large cap stocks can be better appreciated when viewed from the perspective of market-capitalisation buckets, as illustrated in Exhibit 2. Exposure to mid cap stocks in the Russell 1000® Growth Index has declined from 39% of that index in 2010 to just 14% as of 31 August 2018. Also worth noting is where this percentage change was reallocated. We have observed a significant increase in stocks with a market capitalisation greater than $300 billion in the index.

This one-dimensional shift in the market cap exposures has added an additional layer of concentration risk where over 30% of the Russell 1000® Growth Index is focused on those companies with a market valuation of over $300 billion.

Exhibit 3 puts it in perspective. In 2010, Facebook was not even a publicly traded company (IPO: May 2012), but it’s currently the sixth-largest company in the index, behind only Apple, Alphabet, Amazon, Microsoft and Berkshire Hathaway.

Dedicated allocation to mid caps

While the market caps for the largest growth companies have accelerated dramatically since mid-2016, outpacing mid caps, how this trend is likely to progress is uncertain. However, an allocation to large cap growth today provides far less exposure to companies further down the capitalisation spectrum. A dedicated allocation to mid cap growth may prove a key component of a comprehensive asset allocation framework moving forward.

In any market environment, we strongly believe that investors should stay diversified across a variety of asset classes. By constructing your portfolio with the awareness of how these weights shift over time, you can help ensure that your portfolio is properly diversified and that your financial strategy supports your long-term goals, time horizon and tolerance for risk. Diversification does not guarantee a profit or protect against loss.

 

Nick Paul is Institutional Equity Portfolio Manager at MFS Investment Management, a sponsor of Cuffelinks. The views expressed in this commentary are those of the author and are subject to change at any time. These views should not be relied upon as investment advice, as securities recommendations, or as an indication of trading intent on behalf of any investment product.

For more articles and papers from MFS Investment Management, please click here.

 

Endnotes

1 Companies with a market capitalization between $2 billion and $25 billion account for 80% of the constituents in the Russell Midcap® Growth Index, as of 8/31/18.

The Russell 1000 Growth Index® measures US large-cap growth stocks.

The Russell Midcap Growth Index® measures U.S. mid-cap growth stocks. It is not possible to invest directly in an index. Past performance is no guarantee of future results.

Frank Russell Company (“Russell”) is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of Frank Russell Company. Neither Russell nor its licensors accept any liability for any errors or omissions in the Russell Indexes and/or Russell ratings or underlying data and no party may rely on any Russell Indexes and/ or Russell ratings and/or underlying data contained in this communication. No further distribution of Russell Data is permitted without Russell’s express written consent. Russell does not promote, sponsor or endorse the content of this communication.


 

Leave a Comment:

RELATED ARTICLES

Is FOMO overruling investment basics?

Why stock prices are a distraction

Best-in-class, ‘pure-play’ companies give clearer focus

banner

Most viewed in recent weeks

UniSuper’s boss flags a potential correction ahead

The CIO of Australia’s fourth largest super fund by assets, John Pearce, suggests the odds favour a flat year for markets, with the possibility of a correction of 10% or more. However, he’ll use any dip as a buying opportunity.

Retirement is a risky business for most people

While encouraging people to draw down on their accumulated wealth in retirement might be good public policy, several million retirees disagree because they are purposefully conserving that capital. It’s time for a different approach.

Is Gen X ready for retirement?

With the arrival of the new year, the first members of ‘Generation X’ turned 60, marking the start of the MTV generation’s collective journey towards retirement. Are Gen Xers and our retirement system ready for the transition?

16 ASX stocks to buy and hold forever, updated

This time last year, I highlighted 16 ASX stocks that investors could own indefinitely. One year on, I look at whether there should be any changes to the list of stocks as well as which companies are worth buying now. 

Reform overdue for family home CGT exemption

The capital gains tax main residence exemption is no longer 'fit for purpose', due to its inequities, inefficiency, and complexity. Here are several suggestions for adapting or curtailing the concession.

So, we are not spending our super balances. So what!

A Grattan Institute report suggests lifetime annuities as a solution to people not spending their super balances. The issue is whether underspending is the real problem or a sign of more fundamental failings in our retirement system.

Latest Updates

Shares

16 ASX stocks to buy and hold forever, updated

This time last year, I highlighted 16 ASX stocks that investors could own indefinitely. One year on, I look at whether there should be any changes to the list of stocks as well as which companies are worth buying now. 

Superannuation

2025-26 super thresholds – key changes and implications

The ABS recently released figures which are used to determine key superannuation rates and thresholds that will apply from 1 July 2025. This outlines the rates and thresholds that are changing and those that aren’t.  

Shares

The naysayers may be wrong again on the Big Four banks

While much of the investment industry recommends selling the banks, many were saying the same thing 12 months ago. The reporting season shows why bank shareholders should be rewarded for ignoring the current market noise.

Superannuation

Unpacking investment risk in superannuation

Understanding investment risk in superannuation is crucial for your retirement account. Here's a guide on how to define, take, and manage risk to select the right investment mix tailored to your unique circumstances.

Economy

This 'forgotten' inflation indicator signals better times ahead

Money supply provides an early and good read on whether the cash rate setting is transmitting to accelerating, steady or slowing price pressures. This explores recent data on money supply and what lies ahead for inflation.  

Investment strategies

The biggest and most ignored catalyst for emerging market stocks

Relative valuations and superior GDP growth alone are not compelling enough reasons for an improvement in emerging market equity returns. Earnings growth looks more likely to revive the asset class’s strong long-term record.

Property

Has Australian commercial property bottomed?

Commercial property took a beating in recent years as markets adjusted to higher interest rates. From here, strong demand tailwinds and a sharp fall in fresh supply could support solid returns for the best assets.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.