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

Raising the GST to 15%

Treasurer Jim Chalmers aims to tackle tax reform but faces challenges. Previous reviews struggled due to political sensitivities, highlighting the need for comprehensive and politically feasible change.

7 examples of how the new super tax will be calculated

You've no doubt heard about Division 296. These case studies show what people at various levels above the $3 million threshold might need to pay the ATO, with examples ranging from under $500 to more than $35,000.

The revolt against Baby Boomer wealth

The $3m super tax could be put down to the Government needing money and the wealthy being easy targets. It’s deeper than that though and this looks at the factors behind the policy and why more taxes on the wealthy are coming.

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

The super tax has caused an almighty scuffle, but for SMSFs impacted by the proposed tax, a big question remains: what should they do now? Here are ideas for those wanting to withdraw money from their SMSF.

Are franking credits hurting Australia’s economy?

Business investment and per capita GDP have languished over the past decade and the Labor Government is conducting inquiries to find out why. Franking credits should be part of the debate about our stalling economy.

Here's what should replace the $3 million super tax

With Div. 296 looming, is there a smarter way to tax superannuation? This proposes a fairer, income-linked alternative that respects compounding, ensures predictability, and avoids taxing unrealised capital gains. 

Latest Updates

Investment strategies

9 winning investment strategies

There are many ways to invest in stocks, but some strategies are more effective than others. Here are nine tried and tested investment approaches - choosing one of these can improve your chances of reaching your financial goals.

Planning

Super, death and taxes – time to rethink your estate plans?

The $3 million super tax has many rethinking their super strategies, especially issues of wealth transfer on death. This reviews the taxes on super benefits and offers investment alternatives.

Taxation

Raising the GST to 15%

Treasurer Jim Chalmers aims to tackle tax reform but faces challenges. Previous reviews struggled due to political sensitivities, highlighting the need for comprehensive and politically feasible change.

Shares

The megatrend you simply cannot ignore

Markets are reassessing the impact of AI, with initial euphoria giving way to growing scepticism. This shift is evident in the performance of ASX-listed AI beneficiaries, creating potential opportunities.

Gold

Is this the real reason for gold's surge past $3,000?

Concerns over the US fiscal position seem to have overtaken geopolitics and interest rates as the biggest tailwind for gold prices. Even if a debt crisis doesn't seem likely, there could be more support on the way.

Exchange traded products

Is now the time to invest in small caps?

With further RBA rate cuts forecast this year, small caps may be key beneficiaries. There are quality small cap LICs and LITs trading at discounts to net assets, offering opportunities for astute investors.

Strategy

Welcome to the grey war

Forget speculation about a future US-China conflict - it's already happening. Through cyberwarfare and propaganda, China is waging a grey war designed to weaken democracies without firing a single shot.

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.