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Mid-cap value funds remain resilient, but the keys to their success may be changing.
Like most equity-fund categories, the mid-value group's absolute performance in 2002 has been bad. The average fund in the category is down 19.7% for the year to date through Sept. 30, 2002. Nevertheless, only one non-specialty category of domestic-equity funds has fared better in 2002: small-value. With the S&P 500 down 28.3% for the same period, the mid-value group's drop doesn't look quite so bad.
The sources of the category's resilience aren't hard to spot. Put simply, mid-value funds have far less exposure to the tanking technology and telecommunications sector than many other categories. This has held funds such as Fund Analyst Pick Longleaf Partners (LLPFX) in good stead. Other offerings, such as Dreyfus Midcap Value (DMCVX), have been burned by trying to find values in those areas.
The group's tilt away from large caps has also helped. Funds in the category tend either to focus on mid-caps exclusively or to spread their assets across a wide range of market caps. Tellingly, the best 25 performers in the category recently had an average market cap that's just half that of the worst 25 performers.
Things may be changing, however. Over the past three months, several fund categories, including large-blend, large-growth, mid-blend, and mid-growth, have fared a touch better than the mid-value group. This may indicate that the value disparity between mid caps and large caps, and between growth and value sectors, has diminished.
The latter is no reason to eschew mid-value funds, which we continue to think are an attractive part of a long-term investment program. However, if you've loaded up on the category in the past two years, now might not be a bad time to at least consider whether your portfolio is properly diversified.
| Analyst Picks: Mid-Cap Value Category | | Fund | YTD Return ( % ) | 3-Year Return ( % ) | 5-Year Return ( % ) | Overall Risk Score | Expense Ratio ( % ) | | Berger Mid Cap Value BEMVX | -19.16 | 12.14 | --- | 4 | 1.22 | | Longleaf Partners LLPFX | -13.79 | 4.51 | 5.46 | 3 | 0.94 | | T. Rowe Price Mid-Cap Value TRMCX | -14.82 | 6.65 | 5.2 | 2 | 0.98 | | Tweedy, Browne American Value TWEBX | -19.64 | -2.94 | 1.34 | 1 | 1.36 | | Weitz Value WVALX | -25.58 | -1.58 | 8.42 | 2 | 1.06 | | Mid-Cap Value Average | -19.69 | 1.89 | 1.64 | 3 | 1.44 |
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*Risk scores through 9/30/2002. Returns through 9/30/2002
Berger Mid Cap Value (BEMVX). Our newest mid-value pick is run by Tom Perkins, brother of Berger Small Cap Value (BSVIX) manager Bob Perkins. Like his brother, Tom Perkins wants to buy companies trading at or near historic lows, and he will buy fallen-growth stocks. In 2002, that has led Perkins to invest more in downtrodden tech companies than his typical rival. That has hurt the fund, but a sizable cash stake and a number of strong financials and energy picks such as Webster Financial (WBST, news, msgs) and Pogo Producing (PPP, news, msgs) have helped keep the fund from slipping too far. It's down 19.2% for the year to date, but that's actually a hair ahead of the category average.
The fund has also soundly beaten its average peer in each of the preceding three years, and Berger Small Cap Value has amassed a great long-term record using the same style. The Berger funds are being put under the Janus umbrella as part of the merger of Janus and Stilwell Financial, but we don't expect significant change here.
Longleaf Partners (LLPFX). This all-cap offering is once again showing its strength. It's down just 13.8% for the year to date -- that's poor in absolute terms, but it is a significantly smaller loss than its typical peer's. Managers Mason Hawkins, Staley Cates, and John Buford only buy companies trading at discounts of at least 40% to their intrinsic values, and the firm is conservative in its estimates of the latter. That has kept them out of the technology arena, and they've also come up with stellar picks such as YUM Brands (YUM, news, msgs) and Pioneer Natural Resources (PXD, news, msgs). Most recently, the team has been fishing among beaten-down communications firms. Recent buys include a private placement in the convertibles debt of network operator Level 3 Communications (LVLT, news, msgs) (a deal in which Warren Buffett and Legg Mason also participated, and the common stock of cable concern Comcast (CMCSK, news, msgs) (the fund already owns AT&T (T, news, msgs), and Comcast is in the process of buying AT&T's cable assets). The fund's concentrated portfolio won't suit everyone, but its long-term record is excellent, and its management is among the best.
T. Rowe Price Mid-Cap Value (TRMCX). Unlike Longleaf Partners, this is a relatively pure mid-cap offering, with just a smattering of small- and large-cap stocks in its portfolio. Its dearth of large caps and its sizable weightings in the energy and financials sectors have worked to its advantage. There have been a few blowups in the portfolio, but in typical T. Rowe fashion, the fund spreads its assets across more than 100 names, so no one mistake has much of an effect here. The fund is down 14.8% for the year to date, but more than two thirds of its peers have lost more for the period.
Tweedy, Browne American Value (TWEBX). This all-cap fund has lagged its peers in the last few years, but its long-term record, especially on a risk-adjusted basis, is strong, and managers Christopher and William Browne and John Spears have a wealth of experience. The managers aim to buy good businesses on the cheap and have done a nice job of keeping the fund on an even keel over the years -- indeed, the fund's standard deviation over the past three and five years is among the lowest in the category. The fund's 19.6% loss for the year to date through Sept. 30, 2002, is a hair larger than the category average. Names such as Pharmacia (PHA, news, msgs) and bank holding company Popular (BPOP, news, msgs) have fared relatively well, but the fund has been hurt by the likes of Comcast, Household International (HI, news, msgs) and Schering-Plough (SGP, news, msgs).
Weitz Value (WVALX). With a 25.6% loss for the year to date through Sept. 30, this is easily the worst performer of our five Fund Analyst Picks in 2002. We still like it. Manager Wally Weitz, who has a true contrarian streak in him, has often waded into the cable and telecom arenas when they're out of favor. In the past, he has made a lot of money for shareholders doing just that -- indeed, the fund's five- and 10-year returns rank in the category's top decile despite its recent downturn. This year, however, the fund has been pummeled by forays into the likes of Liberty Media (L, news, msgs), Adelphia (ADELQ, news, msgs) and Qwest Communications (Q, news, msgs). Investors here need patience, but Weitz has proven his mettle over time.
E-mail Christopher Traulsen at christopher.traulsen@morningstar.com.
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