Plenty of mid-cap stock-picking opportunities despite falling FTSE 250

The FTSE 250 has lost nearly 6% since the beginning of March, more than any other major UK index, sending returns in a number of UK mid-cap focused funds negative.

Between 1 March and 15 April the FTSE 250 index, which represents UK medium-sized companies, lost 5.77%.

This compares to losses of 2.77% from the FTSE 100, 3.25% from the FTSE All Share and 3.58% from the FTSE Small Cap indices.

As a result a number of UK mid-cap open-ended funds have suffered, including Old Mutual UK Mid Cap, Franklin UK Mid Cap and Money Observer rated fundNeptune UK Mid Cap, which have shed 9%, 7% and 6% respectively during the same period.

Investors taking profits

A number of reasons have been cited for the pull back in the mid-cap space, however the most prevalent is that skyrocketing valuations may have prompted investors take profits.

"This doesn't surprise me because you're looking at an area that was getting on the expensive side. There is probably a bit of profit taking going on; for example the housebuilders in the 250 have had a stellar period and people are probably locking that in," says Adrian Lowcock, senior investment manager at Hargreaves Lansdown.

Ben Yearsley, head of investment research at Charles Stanley, adds the market's recent "risk-off" period may also be to blame, "Over the long term the FTSE 250 has outperformed the FTSE 100, however it is a more volatile index. When the markets are in 'risk off' mode it tends to fall faster and further and markets have taken fright a few times this year, especially during the Ukraine crisis and as tech stocks fell sharply in recent weeks," he says.

A number of UK multi managers recently made moves out of the mid-cap space fearing high valuations, including David Hambidge, head of multi asset at Premier Asset Management, who replaced much of his small and mid-cap exposure with larger companies earlier this year.

Brilliant stockpicking

However, Lowcock suggests that these moves on their own may have had an impact and warns investors in mid-cap funds not to become too flustered by recent poor performance.

"If you're not a mid-cap expert that might cause you to rotate out of mid caps and that may cause a bit of a sell-off, but if you're a long-term investor I would still continue to own mid-cap fund managers because this is where stockpicking is brilliant and can add lots of value," he says.

Matthew Jennings, associate investment director for UK equities at Fidelity, echoes Lowcock, stating: "There are stockpicking opportunities across the whole market, but we remain wary of some of the more expensive 250 stocks where expectations are high, despite some recent falls in prices," Jennings says.

On whether or not this is temporary or permanent pull back, Lowcock is unsure, stating: "There's nothing to say that there will be a drive to a longer-term correction, but if we don't see earnings growth coming through then you could easily see markets correct," he says.