Goldilocks, the savvy investor

Goldilocks is a woman who knows what she wants. She complains when the bed is too hard and she complains when it is too soft. She complains when the chair is too big and she complains when it is too small. Then there is that incident with the porridge. They call her ‘high maintenance,’ but when it comes to investing, her attitude pays off.

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 the sweet spot in the investment universe, combining 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 caps may lack. At the same time, they can grow more quickly than their large cap counterparts, benefiting from flatter management structures, entrepreneurial drive, and quick decision-making.

Mid caps are established businesses generating revenue with solid financial structures that can raise capital at a reasonable cost when they need to. These aren’t highly speculative small caps still burning capital, hoping to make it one day before crashing in a fiery heap.

Nor are they the business giants with huge market share that is impossible to grow more than a few percentage points. 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 to be taken over than the large caps have.

Large caps are covered in such depth by every analyst in the market that there are no hidden gems to find. Large caps give you straightforward equity returns but you are never going to get a spectacular above-market return. Mid caps have greater potential upside.

The S&P/ASX Index Series defines mid caps as the stocks ranking from 51 to 100 by market capitalisation. The following graph shows its mid cap index outperforming other key indices.

Source: Bloomberg

Take a look at some mid cap stocks that have performed well.

• SEEK Limited (SEK) was established as an online employment advertising business in 1997. During the past 10 years it has expanded its services into 12 countries and created training packages with leading tertiary institutions. It now employs 6,000 people globally and is a clear market leader in Australia, capturing 26% of all job placements. 
• David Jones (DJS), the iconic Australian department store chain with locations throughout the country, is subject to a takeover offer from South African retailer Woolworths at a 25% premium to the previous market price. The rationale for Woolworths’ bid was to leverage the existing footprint in Australia, to grow its private label, increase its online presence, and roll out its Village format stores.
• Ramsay Healthcare (RHC) owns, operates, and manages health care facilities throughout Australia, Indonesia, and Europe.  It offers private hospital services including rehabilitation, psychiatric care, day and complex surgery.  It recently embarked on acquisitions including the French hospital operator Generale de Sante and is tendering for projects in Australia. Ramsay is also improving European operations and expanding into new geographic segments. 

Each of these companies has had a stellar 12-month performance.

Cumulative performance is at 12 May 2014. Source: Bloomberg

If you would like to be a savvy investor like Goldilocks, you now know where to look for stocks. We’ve shown you some stocks that did really well over the last 12 months but we haven’t shown you the stocks from this part of the market that did poorly.

As with any investment strategy, diversification reduces the risk without, according to Modern Portfolio Theory, giving up too much of the return.

One approach is to increase your exposure to mid caps by adding Market Vectors Australian Equal Weight ETF (ASX Code: MVW) as part of a diversified portfolio.

MVW is a one-of-a-kind Exchange Traded Fund (ETF) that weights the securities in the portfolio based on the purpose-built Market Vectors Australia Equal Weight Index. It offers true diversification across securities and market sectors, reducing concentration risk. It invests in the most liquid ASX-listed companies across both large caps and mid caps, with a greater exposure to mid caps than you would get from a market capitalisation index. The total number of mid cap securities is 25 out of a total portfolio of 76 securities.

MVW has been on average 97% correlated to S&P/ASX MidCap 50 Index

Source: Bloomberg

… and has outperformed it.

Source: Bloomberg

For more information on MVW click here and speak to your financial adviser or broker.

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