Sector diversification and M&A activity
Garabedian also highlights the diverse sector exposures smid- and mid-cap value companies offer compared to large-cap counterparts. "Smid- and mid-cap value offer more diverse sector exposures than large caps, where more than 40% of the S&P 500 Index weighting comes from IT and communication services," he says. He believes a broadening of economic growth and/or slowing of AI capex activity could relatively benefit more diversified smid-cap exposures in areas like financials and industrials.
Additionally, Ramachandran and Garabedian point to a more accommodative regulatory stance in Washington, which should continue to accelerate the level of deal activity in markets. "Smid caps generally see the biggest relative benefit from an increasing M&A environment given the higher likelihood of being targeted for acquisitions," Garabedian explains. Ramachandran notes, "Historically, lower taxes, deregulation, and lower interest rates have provided a positive backdrop for more domestically focused small-cap companies."
Conclusion
Our small/smid portfolio managers see a range of factors that make their respective investment spaces appealing in 2025. Their insights on undervaluation, market cycles, economic conditions, and sector diversification provide a comprehensive view of the opportunities available to allocators in the coming year.