Alger A Compelling Case for Mid Cap Equities Whitepaper

A Compelling Case for Mid Cap Equities

We believe mid cap stocks present a unique risk-return profile that combines the growth potential of small caps with the stability of large caps. Yet the asset class is easy to overlook. Mid caps represent roughly 20% of U.S. equity market capitalization but only about 8% of U.S. equity fund assets, an underallocation we believe deserves reconsideration. In our view, the mid cap investment case rests on three pillars: 1. Mid cap remains a less efficient market, one where active management has historically added value. 2. Mid caps have grown earnings faster than large caps for a quarter century, and consensus expects free cash flow growth to extend that advantage, aided by a capital spending cycle of historic scale for artificial intelligence (AI) infrastructure that is increasingly landing in the middle of the market. 3. Mid caps trade at a meaningful price-to-earnings (P/E) discount to large caps, and that gap has begun to close as investors take notice.

Fertile Ground for Active Management Figure 1: Median Active Manager Alpha (10-Year Annualized) Over the past decade, the median active manager in U.S. mid cap equities delivered annualized alpha of 0.92%, over three times the 0.28% earned by the median large cap manager (see Figure 1).

We believe the difference reflects a less efficient market. Mid cap managers can choose from a wider set of potentially mispriced securities, and they typically get better access to Source: eVestment for the 10-year period ending May 31, 2026. Data is average of Growth, company management, which supports deeper due diligence. Core and Value median product alpha for large and mid caps. Past performance is not Additionally, there is relatively low sell-side coverage. The average indicative of future performance. mid cap stock is followed by about half as many analysts as the average large cap (see Figure 2). With less coverage, we believe Figure 2: Average Number of Analysts Per Stock dislocations between price and fundamentals are more likely to develop. For the long-term investor, these dislocations can create attractive entry points into businesses that may compound faster than the broader market. When positive developments do emerge, under-followed stocks can reprice rapidly. Earnings surprises and M&A activity tend to draw broad investor attention, closing the gap between price and fundamentals.

The same logic might seem to favor small caps, which have even Source: FactSet as of June 30, 2026. less sell-side coverage. But inefficiency alone does not generate excess returns. Mid caps have historically delivered superior risk- Figure 3: Risk-Adjusted Return Metrics adjusted returns, whether measured by the Sortino ratio, which evaluates returns against downside volatility, or the Treynor ratio, which evaluates returns against market risk (see Figure 3).

Faster Growth Potential Than Large Caps The growth potential of mid caps can be compelling as they expand their market share, enter new markets, or innovate in their respective industries. Additionally, we believe mid cap companies are generally more agile and can quickly adapt to changing market Source: FactSet for the 10-year period ended June 30, 2026. Mid Caps represented by the Russell MidCap Index; Small Caps represented by the Russell 2000 Index. See conditions and capitalize on emerging opportunities. disclosures for definitions. The performance data quoted represents past performance, which is not an indication or a guarantee of future results. Over the last 25 years, mid-cap companies have delivered meaningfully faster earnings growth than large caps. The earnings

Figure 4: Cumulative Earnings Per Share Growth

Source: FactSet as of June 30, 2026.

per share (EPS) for the S&P MidCap 400 Index grew 135 basis Figure 5: Free Cash Flow Growth Comparison points faster annually than the EPS of the S&P 500 Index (see Figure 4). Over the full period, S&P MidCap 400 Index earnings increased 700%, compared with 518% for the S&P 500 Index.

In addition to a structural earnings growth advantage over the past 25 years, mid cap stocks are projected to grow their free cash flow much faster than large cap stocks (see…