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. Last Updated: 07/27/2016

Stock Surge Blurs Lines That Define 'Mid-Cap'

NEW YORK -- You're looking for a U.S. fund in which to invest. 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 probably have just bought a fund that contains large and small stocks as well.


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 $1 billion to $5 billion, a very broad range.


Value Line, which also rates mutual funds, considers small-cap as anything 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 definition 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 is 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 defining mid-cap funds But the market caps in the S&P 400 range 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 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. 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, well, just large.


Got the idea yet?


"Investors should understand the caveat 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," said S&P's Shurgin. "The choice we have to make is not to keep changing the stocks, just to keep them in the range. Over time, there have 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.