This reporting season’s mid-strength flavour

Mid-strength is associated with less alcohol content than full strength but more alcohol than light beer. Mid-strength retains the taste and flavours of full strength without being overwhelmed by alcohol. Likewise, in investing, mid-caps offer the best of both small and mega-caps, representing a mix of established and still developing companies and a balance between the spirit and youth of small-caps and the stability of large companies without being overwhelmed by the mega-caps. In Australia, mega-caps can dominate, and as we are seeing this reporting season, that is not always good for investors.

August has been a month of ups and downs. Mostly downs. First equity markets plunged as investors became spooked about a US recession. Geopolitics and uncertainty also weighed on markets. The result was a ‘rotation’ away from mega-caps.

In Australia, the August reporting season commenced. Results so far have been mixed, mostly surprising on the upside (though some of the forecasts were grim), with a few notable misses.

If we analyse the returns of the S&P/ASX Index series, we may be able to gauge how the market is processing these results, and how it is positioning for the next stage of the economic cycle.

This series represents the top ASX-listed companies by market cap. You would likely be most familiar with the S&P/ASX 200 which includes the top 200 ASX-listed companies. But there is also the S&P/ASX 300, the S&P/ASX 100, and the S&P/ASX 20, which represent the top 300, top 100, and top 20 companies on ASX respectively. Similarly, the Series also includes the S&P/ASX Small Ordinaries (which includes the top 100 to 300 listed companies) and the S&P/ASX MidCap 50 (the companies in ranked 50 to 100).

Since its launch in 2000, the S&P/ASX MidCap 50 index has outperformed the other indices in the S&P/ASX equity series. The S&P/ASX 20,50,100,200 & 300 have all returned roughly the same, while the S&P/ASX Small Caps has underperformed.

For this reason, mid-caps have been called the ‘sweet spot’ of the Australian equity universe. And it seems, if we consider August’s performance so far, in the face of macroeconomic headwinds and a busy reporting period, they are once again showing their strength. Of course, this is a short time and past performance should not be relied upon for future performance.

The following table shows the trailing performance of the S&P/ASX MidCap 50 Index and other key S&P/ASX indices to 15 August 2024. The S&P/ASX MidCap 50 Index delivered the best performance month-to-date (MTD), year-to-date (YTD), and 5, 10 and 20-year periods.

Investors may worry this return might come with too much risk. The Sharpe ratio combines the return measure with a volatility (risk) measure to quantify the relationship between the returns and risk. The greater the value of the Sharpe ratio, the better the risk-adjusted return. The table below shows that the S&P/ASX MidCap 50 Index has delivered the best risk-adjusted returns over 5, 10 and 20 years.

So what is behind the different performance outcomes of the S&P/ASX index series, or the similar outcomes in the case of the S&P/ASX 300, 200 and 20? We think it is the holdings, the sectors and the concentration.

S&P/ASX Index Series - Top 10 holdings

Below you can see the top 10 companies of the S&P/ASX 300 and 200, the S&P/ASX 50, the S&P/ASX Mid-Cap 50 and the S&P/ASX Small Ordinaries. In the S&P/ASX 300, and 200, the top 10 make up over 45% of the respective indices. Investors seeking diversification from a portfolio of 300 or 200 stocks would not expect such concentration. In these indices, the small sized companies outside of the top 10 would not have much impact on performance. Compare this to the S&P/ASX Small Ordinaries and the MidCap 50, in which the smaller size of the top 10 allows for greater representation elsewhere in the portfolio.

S&P/ASX Index Series – Sector allocation

The issue of concentration is also evident when you compare the sector allocation of each index. The S&P/ASX 300 & 200 both have over 50% allocated to two sectors. Both the S&P/ASX Small Ordinaries and the S&P/ASX MidCap 50 look to have better diversification, as they have better representations of sectors.

Learn more about VanEck and how we provide investors exposure to a diversified portfolio of ASX-listed mid-sized companies here.