Today's mid-cap can grow into tomorrow's giant

Mutual funds

November 24, 1996|By Jerry Morgan | Jerry Morgan,NEWSDAY

You're looking for a fund to invest in.

You think a large-cap fund may grow too slowly and a small-company fund may be too volatile. So you opt for the middle of the road, a mid-cap fund.

Congratulations. You have probably just bought a fund that contains large stocks and small stocks as well as mid-cap stocks.

Why? First, "there is no standard definition of mid-cap" among fund companies, said Laura Lallos, senior analyst for Morningstar Inc. in Chicago.

Second, a long bull market keeps shifting the boundaries, which were never consistent to begin with.

And that will continue as long as the bull market does.

"With the way the market has performed, it has been more difficult to prevent drift to make sure the funds don't stray from their broad range," said Peter Kris, managing director of the very hot Van Wagoner Funds.

Morningstar, in its new definitions, considers mid-cap funds to be those with stocks that have a median market capitalization (the value of outstanding shares) of between $1 billion and $5 billion, itself a very broad range.

Value Line, which also rates mutual funds, considers small-cap as up to $1 billion but then has two mid-cap ranges -- $1 billion to $5 billion and $5 billion to $10 billion -- and a large-cap of more than $10 billion.

Lipper Analytical Services Inc. lists mid-cap funds in a more technical way that keeps them between $800 million and the "average market capitalization of the Wilshire 4500 index (as captured by the Vanguard Index Extended Market Fund)," which a Vanguard spokesman said was about $1.3 billion.

The range gets broader still. Many fund companies say they use the Standard & Poor's 400 index as a guideline for what mid-cap funds are.

But the market caps in the S&P 400 range are from $159 million to $6.2 billion, said Elliott Shurgin, vice president and general manager of indexing at Standard & Poor's.

"The average stock is about $1.6 billion and the median [half above, half below] is about $1.3 billion," Shurgin said.

Those S&P ranges are liberally interpreted. Fidelity says small-cap is $1 billion market capitalization at the time of purchase; mid-cap from $110 million to $5 billion, which is how it interprets the S&P 400; and large-cap greater than $1 billion.

Janus considers small-cap to be under $1 billion in market capitalization or less than $500 million in gross annual revenues. Its definition of the S&P 400 is $118 million to $7.5 billion, and large is just large.

Dreyfus lists its small-cap range as $90 million to $900 million; its mid-cap from $400 million to $4 billion; and its large stocks from $900 million to $90 billion.

Got the idea yet?

"Investors should understand the caveat," S&P's Shurgin said, "that there is a large overlap between small- and large-cap stocks within that range, but it reflects several stocks at either end of the range. The choice we have to make is not to keep changing the stocks, just to keep them in the range. Over time, there has been some market shifts, and small goes mid-cap and mid-cap goes large-cap."

Dan Miller, chief investment officer for Putnam's specialty growth equities, said the reason for the large overlap is that "it is somewhat artificial to say that below this number is small and above is big. The median [market cap] just changes all over the place depending on the market and individual portfolio actions."

Miller's market action is the answer to what seems like a problem. Hot performance has driven the value of small stocks higher and it makes mid-cap funds veer up to numbers larger than the target ranges.

The market has been very, very good to them.

From the market low in October 1990 through last Nov. 7, small company growth funds are up 242 percent and mid-cap funds 227 percent, according to Lipper.

T. Rowe Price Vice President Steven Norwitz said his firm's New Horizons fund "has some large companies not because they were bought that way but they were small-cap companies that have done well and the manager is reluctant to sell them while they are still growing."

Not too long ago, some managers considered $100 million to be a small-cap stock. Now Wagoner's micro-cap fund, for example, has a top of $350 million in market cap, and Kris said some of the companies in the small-cap Emerging Growth fund have "grown with the development of technology stocks. We don't consider them large-cap companies even though their market cap has gotten pretty big."

How can you find out what is what?

"You have to rely on the outside organizations to compare portfolios across fund companies," said Putnam's Miller.

Financial planner Ron Roge of Centereach, N.Y., advises reading the dreaded prospectus.

"It should say what the objective of the fund is and how it will meet it," he said. "And it should tell you if the size of the companies it will buy is limited, or can they buy basically whatever they want."

But for now, the drift of small-cap into mid-cap and mid-cap into larger funds seems good for investors.

"[Mid-cap] is where the majority of companies are today and the majority of those stocks have been very rewarding," Roge said.

"Some of the mid-cap companies will become the giants of the future," which is why you buy them in the first place.

Pub Date: 11/24/96

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