Street Wise: A mid-cap manager who covets the spotlight

Five years of managing a mid-cap stock portfolio has introduced Tony Dong to the realities of what he calls the “middle-child syndrome.”

While mid-caps have long lingered near the bottom of the asset-allocation food chain, the category was virtually lost in the shadows during what has been one of the more volatile periods in recent market history.

“To get diversification, you always start with the extremes – the large-caps and then the small-caps,” says Mr. Dong, manager of the $45 million Munder Mid-Cap Select Fund (MGOAX).

“Initially, mid-caps were for the more sophisticated institutional investors,” he adds.

In some respects, that’s still the case, and that’s the reason Birmingham, Mich.-based Munder Capital Management Inc. didn’t offer a retail version of the fund until three years ago.

But Mr. Dong, who manages $180 million of Munder’s $32 billion, believes there’s a case to be made for mid-caps regardless of the market conditions.

“The mid-cap area is the real sweet spot of the market and it doesn’t garner a lot of attention from analysts or from investors,” he says, referring to mid-cap companies as “small-cap survivors and tomorrow’s blue chips.”

While that may not be true in the case of all mid-cap companies (defined by Mr. Dong as having market capitalizations between $1 billion and $10 billion), there is some validity in the idea that the category is more stable than smaller companies and easier to analyze than the global conglomerates.

“Companies of this size will have a history and you know they have survived the highest-risk part of their life cycle,” he says. “The businesses in general are between five and 10 years old, and they are easier to evaluate.”

Not only are mid-caps more manageable than small-caps, but Mr. Dong also makes a strong argument for their higher performance and lower volatility. From March 31, 1981 – the inception date of the Russell 2000 Index – through June 30 of this year, the Standard & Poor’s Mid-Cap 400 Index achieved 59% more return than the small-caps.

Further, according to Mr. Dong, the mid-cap index outperformed the Russell 2000 while producing only 91% of its volatility.

Mid-caps also stack up well against the blue chips when considering earnings per share for 2004.

The consensus earnings estimate for 2004 has the Standard & Poor’s 500 stocks up 9% over 2003, while the S&P 400 is expected to improve by 20%.

Yet on a valuation basis, the S&P 500 is more expensive, with an average price-earnings ratio of 18, compared to the mid-cap index’s average p/e of 16.

The Munder fund had gained more than 21% year-to-date through Thursday, compared with a 17% gain for its benchmark S&P Mid-Cap 400 Index.

A recent addition to Mr. Dong’s portfolio includes a Los Angeles-based animal health care company that continues to dominate its specialized market.

VCA Antech Inc. (WOOF) has been increasing revenues at a 7% annual rate for more than two years thanks to a pet population growth rate of about 2% per annum and a 5% increase in procedures and pricing.

The company, which is trading at nearly $22 a share, has seen its stock more than double since going public in November 2001.

With 225 hospitals and 18 clinical labs around the country, VCA dominates a highly fragmented industry made up mostly of small, local clinics.

Much of the company’s growth has come through acquisitions, including 10 deals in 2003. But it is also enjoying a secular growth trend in animal-health care, according to Mr. Dong, “without the negatives.”

Unlike health care for people, animal-health care doesn’t come with the red tape or pricing pressures from the insurance industry. And because 90% of the health-care services for pets are paid in advance, there is minimal reimbursement risk.