Insights

Portfolio Managers Quoc Tran and Michael Im, CFA, discuss why mid-cap stocks present a compelling opportunity and how the Fund is selectively positioned to capture a potential broadening of market leadership.

The Fund’s mandate allows for the purchase of mid- and large-cap stocks based on relative opportunity. What makes mid-caps a compelling allocation today despite recent large-cap dominance?

Over the past 30 years from 1996 through 2025, the Russell Midcap Index has delivered results that nearly mirror the S&P 500 Index—roughly 10% annualized. However, over the past decade large-caps significantly outpaced their mid-cap peers, while in the two decades before this run, mid-caps outperformed, supported by longer growth runways and more reasonable valuations. After an extended stretch of mid-caps lagging, the case for mean reversion strengthens. Even if mid-caps simply match the S&P 500 going forward, it could be a strong outcome; if leadership rotates, the upside for mid-caps could be even better. For allocators, this is a powerful, timely case to add mid-cap exposure to portfolios now.

In addition, today’s S&P 500 is highly concentrated, with the top 10 stocks comprising approximately 40% of the Index’s weight, versus less than 6% for the top 10 holdings in the Russell Midcap Index. That concentration is magnified by sector exposure—about a third of the S&P 500 is in technologyand communication-heavy areas. Also, it’s not just weighting; in the last three years, roughly 40% to 60% of S&P returns have come from the mega-cap giants. When so much of the market’s weighting and return is coming from so few names, the bar for “continued dominance” gets higher. Therefore, mid-cap stocks don’t need these large-caps to experience a sharp reversal; they have the potential to outperform simply through a catch-up phase if leadership broadens.

How is the Fund taking advantage of this mid-cap opportunity?

The Fund has purchased several new positions that have market capitalizations between $4 billion and $65 billion, including cosmetics company, e.l.f. Beauty, and electrical and logistics provider, Wesco International. Another new purchase is International Flavors & Fragrances (IFF), a $17 billion company that makes the ingredients used in flavors and fragrances for food, beverages, and personal care products. IFF maintains a #1 or #2 position in most of its product categories. Past acquisitions have not been as successful as anticipated and increased debt levels, but new management is restructuring the company by selling weaker divisions, paying down debt, and refocusing on the core business. At 14x 2027 price-toearnings, the stock appears inexpensive versus peers’ 20x, growth has been steady, and the turnaround creates attractive upside potential over time.

IFF is an example of a high-quality company that has largely flown under the radar as investor attention has remained concentrated in large-cap technology stocks.

How do valuations and growth metrics of the Fund look relative to the S&P 500 and Russell Midcap Indices?

We seek to invest in companies that exhibit faster sales growth and higher quality, as measured by above-average return-on-equity (ROE) relative to both broad market indices. This focus reflects our belief that long-term investment success is driven by businesses with sustainable competitive advantages, durable growth trajectories, and disciplined capital allocation. By emphasizing companies with superior sales momentum and high ROE, we aim to capture long-term appreciation potential while anchoring our portfolio in fundamentally strong franchises that can compound value over time.