The Mid‐Cap Effect in Europe

Abstract

As described in our December 2012 Global Market Report, The Mid‐Cap Effect, since the outbreak of the global financial crisis in 2008, global mid‐cap stocks have been unique because they have provided a better risk‐adjusted return than a combination of large and small‐cap stocks. Some have argued that recent global trends, such as low interest rates, decreasing risk aversion and the availability of cash for acquisitions, may have favoured the outperformance of mid‐cap stocks.

These trends have been present in Europe, although not as strongly as in global markets. From October 2008 to October 2013, mid‐cap stocks in Europe have outperformed large caps by a cumulative 12 percent, which is lower than the 19 percent outperformance measured for the MSCI World Mid Cap Index. The outperformance for Europe was mainly concentrated in 2010 and in 2013.

If mid‐cap stocks are viewed as a fairly distinct opportunity set, institutional investors should be equipped to monitor how this particular segment influences their portfolios’ risk and return characteristics. In this Market Report, we show how the Barra Europe Equity Model (EUE4) achieves this by utilizing the Non‐Linear Size factor.

Keywords: Mid-Cap, Equity Risk Model