A feature of the recent recovery in stock markets has been the leadership role played by large-caps. This represents a reversal of a longer-term trend, particularly in the UK, of medium-sized businesses setting the pace.

As the charts show, year-to-date the FTSE 250 has lagged behind the FTSE 100 while in the US the Russell 2000 (made up of the 2000 smallest companies in the broad-based Russell 3000 index of US stocks) has come a distant second-best compared with the large-cap S&P 500 benchmark.

Berenberg analyst Jonathan Stubbs notes: ‘Support for (UK) mid-caps remains in place, with plenty of companies trading at attractive valuation levels with high levels of cash generation and strong balance sheets.’

Beyond these short-term attractions, which are already proving a driver for M&A activity, there are several fundamental reasons why mid-caps might be of interest to investors:

• Growth potential: First, because they are smaller, mid-cap firms typically have more significant growth potential and can increase their profit at a rapid rate if things are going well.
• Choice: The FTSE 250 is more diverse than the FTSE 100 with areas such as engineering and technology more widely represented.
• Potential for earnings upgrades: Companies in the FTSE 250 are not as widely followed as those in the FTSE 100 so analysts are more likely to underestimate (or overestimate) earnings. This can be both good and bad: earnings upgrades can lead to increases in the share price although the reverse is true if a company falls short of earnings forecasts.

Although mid-cap stocks can be more volatile than larger companies they are unlikely to see the wild share-price swings which can occur in small- and micro-cap companies. They are also much more likely to pay a dividend and can therefore offer a winning combination of growth and income.

Nick Train has been busily apologising again for the underperformance of his popular Finsbury Growth & Income Trust (FGT). Train has blamed this on a lack of exposure to the technology and energy sectors which seems a logical diagnosis.

However, the cure is less obvious. While Train points to additions to the portfolio since 2020 like Rightmove (RMV) and Experian (EXPN), these are not technology stocks as such – even if they apply technology in their respective property market listings and credit data business areas.

It would seem a mistake at this point to suddenly start buying lots of technology businesses, which he has previously acknowledged he does not understand, leaving him with little option but to sit tight and hope performance picks up.

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