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Scout Mid Cap Fund Hits the Market Sweet Spot

The managers of Scout Mid Cap aren’t afraid to make big sector bets.

If small-company stocks offer the chance to get into businesses on the ground floor, and big blue chips offer world-beating stability, what do shares of midsize companies bring to the table? Historically, superior returns. Since 1980, the Russell Midcap index, which tracks U.S. stocks with $934 million to $34 billion in market capitalization (stock price times shares outstanding), returned 12.9% per year, on average—ahead of the large-cap Standard & Poor’s 500-stock index (11.7%) and the small-cap Russell 2000 index (11%).

Patrick Dunkerley, who comanages the Scout Mid Cap Fund (UMBMX), describes mid caps as a market sweet spot, offering more stability than small companies (thanks to, among other things, more-seasoned executives) and better growth potential than large firms. The fund, which holds 142 stocks, aims to eclipse the long-term performance of the Russell Midcap index.

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The managers start with an overall view, updated weekly, of the economy and the broad stock market. The goal, says Dunkerley, is to develop investment themes—areas of the market that appear especially attractive. From there, they evaluate individual stocks using a 10-point checklist that includes a company’s indebtedness, profitability, and price compared with projected earnings, as well as whether there is a catalyst that will spark growth in a company’s business.

The result is a diversified portfolio in which no single stock represents more than 4% of total assets currently. But the managers aren’t afraid to devote significant assets to a particular sector. Much of the fund’s excellent one-year performance stems from its 19% holding in technology stocks (compared with a 14% holding in the benchmark index).

Dunkerley cites top holding DXC Technology as a bright spot. The managers owned shares off and on in the information technology services company (then called Computer Sciences Corp.) starting in 2009. They re-upped in 2012. The current iteration of the firm was formed from a merger between Computer Sciences and a business spun off from Hewlett Packard Enterprises; it began trading as DXC in April. Since then, the shares have returned nearly 24%.

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