This month’s Mutual Fund First Cut seeks domestic mid-cap stock funds that have performed well within their category and against their peers over the last five years. This is a continuation in theme from last month’s First Cut, which applied the same criteria to domestic small-cap stock funds. In total, 20 mutual funds made the First Cut.

The mid-cap funds are grouped by the categories of blended, growth and value, ranked by five-year return. Category averages were included to better compare each fund to its peers and to see how the different investing styles performed.

Funds without consistent and strong relative performance within their categories were eliminated by requiring five-year, three-year and one-year returns to have A+ Investor grades of C or better. The screen excludes funds with loads and requires a grade of C or better for expense ratio category rank.

To eliminate funds with excessive risk, funds with an A+ Investor grade of F for category risk index were excluded. Funds designated as institutional were excluded, in addition to funds with special share classes. The funds on the list are also open to new investors, with a minimum initial purchase no greater than $10,000.

The category risk index was included to assess the volatility of each fund. If you invest in an actively managed mutual fund with higher risk relative to its peers, you should be properly compensated with higher relative returns.

The performance of the blended, growth and value mid-cap funds on the First Cut list are in line with recent market trends. Across market capitalizations, value funds lead one-year performance. Otherwise, growth funds still dominate recent long-term performance over the last five years.

Annualized five-year returns for mid-cap categories are underperforming comparable returns for large-cap categories. However, recent large-cap dominance has to do with “short-term” economic disruptions in the last two decades; mid-cap and small-cap stocks have outperformed large-cap stocks over longer time periods.

Mid-Cap Funds With Consistent & Strong Relative Performance
(Ranked by Five-Year Return)

A+ Investors can see an updated list of funds that pass this screen at www.aaii.com/funds/firstcuts.

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