US Edition
The FTSE 250 index is perennially overlooked by investors. Income seekers prefer the higher yields on offer in the FTSE 100 index, while investors aiming for capital gains often look to smaller companies.
However, in Questor’s view, the mid-cap index is a sweet spot that is set to deliver stunning total returns over the long run. Indeed, the FTSE 250 index’s past returns dwarf those of other British indices.
Over the past 20 years, mid-cap shares have posted an annualised capital gain of 7pc. By contrast, the FTSE 100’s annual capital return is just 3.1pc. And despite being far riskier than investing in mid-caps, the FTSE SmallCap index has managed to generate an annualised capital gain of just 5.4pc over the same period.
Even the all-conquering S&P 500 index has posted a return which is not significantly greater than that of the UK mid-cap index. It has returned 7.9pc per annum over the past two decades, although it should be pointed out that the FTSE 250 index’s price level is only 6pc higher than it was over eight years ago.
Before then, its returns easily surpassed those of the S&P 500 index. This highlights the scale of its present unpopularity and the attractiveness of the investment opportunity it now offers.
Indeed, FTSE 250-focused investment trusts such as JPMorgan Mid Cap trade at vast discounts to their net asset value (NAV). Its shares are currently priced 16pc below NAV and have only traded at a larger discount for a brief period during the darkest days of the pandemic.
Since they have outperformed the FTSE 250 over the past decade by posting an annualised return of 6.57pc versus 5.22pc for the index, they offer extremely good value for money. The trust does not have a particular value or growth bias.
Instead, it seeks to buy high-quality stocks that have favourable long-term outlooks when they trade at attractive prices. Its portfolio is largely comprised of cyclical companies that, by nature, are likely to struggle during an economic slowdown that could persist for the remainder of this year.
However, with Britain set to avoid a recession and GDP growth forecast to increase to 1pc next year from 0.3pc this year, investors are likely to begin to look ahead to the green shoots of recovery. The trust’s overweight exposure to sectors including industrials, consumer discretionary and technology is therefore likely to deliver high returns over the long run.
Furthermore, about 39pc of the FTSE 250 index’s revenue is generated from outside the UK. This means that, while mid-cap share prices are heavily influenced by the British economy’s prospects, the world economy’s performance also has a sizeable impact on their returns.
As a result, Britain’s current status as an unpopular investment destination is unlikely to persist as global economic growth gathers pace. This means that bargain basement mid-cap stock prices are set to be a temporary phenomenon. The trust’s gearing ratio of 9pc means that its share price is likely to be more volatile than that of the index.
However, given the FTSE 250’s long-term capital growth potential, gearing is likely to provide a boost to the trust’s returns that increases the likelihood of benchmark outperformance in the future.
While investors are thoroughly disinterested in the FTSE 250 index, it offers a sweet spot between large-cap and small-cap stocks. Unlike the FTSE 100, it contains fast-growing companies that can realistically produce exceptional share price gains.
Yet it is far less risky than small-caps because of the size, scale, diversity and financial strength of its incumbents. As a result, it offers a potent risk/reward ratio. When exactly the trust and wider mid-cap index will deliver on their potential is a known unknown.
Britain has clearly not reached the end of its present period of rampant inflation and rapid monetary policy tightening that is currently weighing on share prices.
However, a new era will ultimately begin that is more favourable to corporate performance, investor sentiment and share prices.
Given the excellent track record of the JPMorgan Mid Cap investment trust, its large discount to NAV and overweight exposure to cyclical sectors, it is set to deliver exceptional share price returns over the long run.
Questor says: buy
Ticker: JMF
Share price at close: 899p
Read the latest Questor column on telegraph.co.uk every Sunday, Tuesday, Wednesday, Thursday and Friday from 6am
Read Questor’s rules of investment before you follow our tips