Make money with mids

If you are willing to take a long-term view, equity valuations are without a doubt very attractive and many argue that the best opportunity for UK investors is right here. Read more on equity opportunities.

If you are in the market for the long haul, you can boost your growth by moving down the market-cap scale, but for lower volatility opt for mid-caps rather than small-caps. The FTSE 250 has had a good 10-year run, but should continue to do better because the companies in this index are less mature than those in the FTSE 100 and have better growth prospects. FTSE 250 companies are at a typically strong growth phase because they are progressing from being small to large. Read more on mid-caps.

In a less researched segment of the market such as the FTSE 250, there is an argument for using active funds, where good fund managers can make their mark. A fund which has done this is Royal London UK Mid Cap Growth Fund, one of the best performing mid-cap funds and one of the top 10 UK All Companies funds over five years. It is also well within the top 25 per cent of funds over one and three years, though current fund manager Derek Mitchell has run the fund for the last two years.

As well as a great performance, the fund has a reasonable total expense ratio (TER) for an active equity fund of 1.44 per cent, so charges eat into less of your returns.

The fund has a strong valuation focus with a preference for cash-generative shares and a concentrated portfolio of 40 to 60 stocks. These are mainly from the FTSE Mid 250 Index, but the fund may also hold some others, typically stocks which have recently exited or are likely to enter the FTSE 250.

When selecting stocks, Mr Mitchell first forms a macroeconomic view, as he believes the factors driving the global economy are key to selecting the right sectors and companies. He forms his view by working with Royal London's economist, other fund managers, external brokers and strategists, although within agreed risk parameters Royal London fund managers are free to make their own investment decisions rather than follow a house style or model.

Once Mr Mitchell has identified the sectors he thinks are capable of delivering consistent earnings performance, he ranks them on a variety of valuation criteria to determine which to back. He then selects sectors or FTSE 250 shares which can benefit from existing or future themes such as emerging market growth and outsourcing, seeking companies whose market value is below their long-term worth and where there is a catalyst to exploit this and benefit from positive earnings surprises.

Mr Mitchell is currently looking to higher-yielding equities, companies with emerging markets exposure and those which can grow their dividends. He believes this is because the growth rate for developed economies will be lower for a number of years and these types of companies are likely to do well in this economic environment.

He also thinks that UK equities are very oversold, but bond purchases in Europe or more US quantitative easing could lead to a rapid turnaround initially led by industrials - the largest sector exposure in the fund.

Mr Mitchell has a great deal of fund management experience, having worked at the Royal London Asset Management since 2007 and also at F&C Asset Management for 21 years.

Key fund data:

Source: Morningstar, *Royal London.

Performance data as at 22 August 2011.

Top 10 holdings as at 31 July 2011

Sector breakdown: