Most investors tun to the large cap index to allocate a sizeable chunk of their core long term equity portfolios – market participation with lower volatility is what they seek.
Many alpha seekers allocate to the small cap index in the quest for market beating returns albeit with higher level of volatility.
But Sirshendu says the real winner is the one in the middle – the Midcap Index – which over the last 20 years has actually outperformed the small cap index in absolute terms with much lower volatility and has outperformed the large cap index but with marginally higher volatility, resulting in the best risk adjusted return among the 3 cap segments.
Don’t gravitate to the extremes – stay in the middle to get the best out of markets. Y-o-Y performance suggests many years where large caps came on top, many where small caps came on top. Midcaps – by remaining the one in the middle – have come out on top over market cycles.
While small cap investing is best done through actively managed funds given the narrowness of the index vs number of stocks available (250 in index vs 1000+ stocks with reasonable liquidity), cases for active and passive styles can be made equally cogently in the mid and large cap spaces.
Sirshendu suggests that midcaps should be at least 15-20% of your equity portfolio.