NOT TOO DULL, NOT TOO RACY: MIDCAPS MAY BE JUST RIGHT

September 30, 1991

The introduction last June of a new stock market index -- Standard
& Poor's MidCap 400 -- put the spotlight on an unheralded group of
about 170 mutual funds that specialize in stocks with market
values between $200 million and $2 billion. These so-called midcap
stocks occupy the middle ground between corporate behemoths and
entrepreneurial midgets, and some investment analysts think that the
midcaps (and the funds that invest in them) could be among the
superstars of the 1990s. Says Don Phillips, publisher of the
newsletter Morningstar Mutual Funds ($395 a year; 800-876-5005):
''Because of their greater growth potential, midcaps could outperform
the market in the '90s the way large companies did in the '80s and
small companies did in the '70s.'' Indeed, mid-size stocks have
already overtaken big companies in five-year performance, as you can
see in the chart on page 52. A good portion of that gain came during
a 42% surge in the past 12 months (the four-month-old index has been
backdated to produce a long-term record). Over the same 12 months,
the big stocks in the S&P 500 rose 27%, while the Russell 2000, a
small-stock benchmark, gained 31%.
One peripheral reason for the midcaps' bright prospects, say the
analysts, is the very existence of the S&P MidCap 400, coupled with
the popularity among institutional investors of indexing -- that is,
buying a basket of stocks designed to duplicate the performance of a
particular market index. The new benchmark, say midcap supporters,
will help entice institutional investors out of blue chips and into
midcaps.
Midcap fans maintain, however, that the sector's real appeal to
big-money investors lies in its growth potential. Says James Giblin,
portfolio manager of top midcapper Cigna Value: ''In a sluggish
economy, institutional investors aren't going to find enough growth
opportunities among the big companies.'' Jeff Malet, manager of
midcap star Pacific Horizon-Aggressive Growth, adds that this
long-neglected sector tends to be overstocked with what he calls
''underfollowed'' companies -- those that few Wall Street analysts
watch closely. That leaves plenty of opportunity, he says, for astute
midcap managers to identify up-and-comers before the institutions
start piling in.
The problem for fund investors is that midcap funds generally
aren't easy to distinguish from other equity funds. Some fund
sponsors have recently launched funds specifically designed as
midcap specialists, including Calvert-Ariel Appreciation (up 24.8%
since its inception in January 1990), and Dreyfus People's S&P MidCap
Index, a two-month-old fund designed to mirror the new $ index. Most
midcap funds, however, aren't expressly advertised as such.
To help identify the top prospects in this elusive category, MONEY
asked the mutual fund data publisher Morningstar to screen 1,300
funds for those whose median stockholding had a market value between
$200 million and $2 billion. Of the roughly 120 diversified funds
that met that guideline, we then selected the half-dozen with the
best risk-adjusted returns over the past five years. They appear,
along with performance records, cost data and phone numbers, in the
table on page 51.
Not surprisingly, our top midcap funds tend to be growth or
aggressive growth seekers with higher risk profiles than the average
equity fund, though below that of the average small-company fund. For
example, even the steadiest of the bunch, Delaware Group-Delcap I,
has a risk level 20% above that of the average equity fund. The
diciest, Twentieth Century Ultra, is 60% more volatile. Best advice:
play midcaps only with money that you can salt away for at least five
years -- and only if you're prepared to ride out some 10% to 15%
setbacks in the meantime.

CHART: NOT AVAILABLE
CREDIT: Sources: Lipper Analytical Services and Morningstar Inc.
CAPTION: SIX TOP FUNDS THAT LIKE THEIR STOCKS MEDIUM
The half-dozen midcap funds below rank in the top fifth of all
equity funds over the past five years in risk-adjusted performance.
The medium-size stocks they own have outperformed the S&P 500 index,
as well as the small-cap benchmark, the Russell 2000.

CHART: NOT AVAILABLE
CREDIT: MARIA TAFFERA
Source: Standard & Poor's
CAPTION: MIDCAPS PASS THE S&P 500 IN THE STRETCH
The big stocks in the S&P 500 were unbeatable from 1986 to 1990,
rising 92%. The medium-size issues in the MidCap 400 have overtaken
them, though, thanks to sharp gains since last fall.

HOLE YARDS PAR R1 R2 R3 R4
OUT
HOLE YARDS PAR R1 R2 R3 R4
IN
Eagle (-2)
Birdie (-1)
Bogey (+1)
Double Bogey (+2)