Everyone easily recognizes the large-cap companies: the big banks, Coca-Cola Co. or Manulife Financial Corp. Small-cap firms also have an identity: they’re the entrepreneurial start-ups on the road to glory. But what about mid-cap companies?

Perhaps the best way to get a handle on the mid-cap universe is to view it as a collection of the most successful small-cap stocks and the least successful large-caps.

Most managers are looking for firms on the upswing. Mid-cap growth companies tend to be at an earlier stage in their revenue and earnings growth, giving them an advantage over larger firms. The advantage mid-caps have over small-caps is that they typically have more than one product or market.

One well-regarded Canadian equity fund with a penchant for mid-sized Canadian companies is the $338-million Fidelity Canadian Opportunities Fund offered by Toronto-based Fidelity Investments Canada Ltd. It jumped 29.3% in 2003, followed by a strong gain of 16.4% in 2004, vs a 14.5% rise in the S&P/TSX composite index that year. In 2005, the fund was up 16.8%, vs a 24.1% return for the index.

A larger offering is the $1.3-billion Dynamic Power Canadian Growth Fund offered by Toronto-based Dynamic Mutual Funds Inc. It struggled a bit at the turn of the new century but has improved more recently relative to its peer group. Besting the index return of 26.7%, the fund jumped 35.6% in 2003, then earned 16.7% in 2004, before rising 28.4% last year.

Both funds earn four-star ratings from Morningstar Canada, suggesting they have been above-average performers over the past five years, with the Dynamic fund outperforming its benchmark in both up and down markets, Morningstar reports.

After 11 years as an analyst and portfolio manager with London Life Insurance Co. , Rohit Sehgal joined Goodman & Co. Investment Counsel Ltd. , Dynamic’s money-management arm, in 1998. Now chief investment strategist, he is responsible for several Dynamic funds, including Dynamic Power Canadian Growth.

A growth manager, Sehgal blends his top-down view with bottom-up fundamental analysis. He begins by studying trends in interest rates, currency patterns and the direction of corporate earnings. Once he completes his top-down view, he moves to either an aggressive or defensive stance, resulting in fairly significant swings in portfolio composition. In general, he’s looking for firms that display superior revenue and earnings growth, as well as price momentum.

A protegé of long-time Fidelity manager Alan Radlo, Maxime Lemieux joined Fidelity right out of university. After graduating from McGill, he joined the firm as a research associate in 1996 and has moved quickly up the ladder. A growth-at-a-reasonable-price manager, Lemieux likes to focus on bottom-up fundamental research, looking for companies whose financial statements suggest they can grow in any market environment.

Both Sehgal and Lemieux like to have their money at work in the market. Recently, neither fund held much cash. The Fidelity fund has placed about 7% of the portfolio in income trusts.

Lemieux’s fund’s top 10 holdings account for 29% of assets; in Sehgal’s case, they represent 26%. The Dynamic fund seldom holds more than 70 positions, whereas the Fidelity fund tracks almost twice as many, coming in around 130 — a lot of names for a fund that invests mostly in Canadian stocks, notes Morningstar. Both would have to be described as “high-turnover options,” increasing the funds’ expense complexions.

Although the Dynamic portfolio certainly has its share of recognizable large caps, its average weighted market cap of $6.7 billion follows the mid-cap fund model. The Fidelity fund actually has a lower overall market cap. Both have fairly high price/earnings multiples. The Dynamic fund produces the lower dividend yield of the two, although neither’s yield is very high (which is not unusual, given that growth companies are generally more concerned with investing in internal projects than hiking dividends).

Overweighted in tech

Despite runaway commodity prices, the Fidelity fund’s exposure to materials is slightly underweighted, as is the case with energy stocks. Consumer stocks, however, play a large role in the portfolio. An overweighted position in technology — Lemieux is still looking for improvements in product and inventory cycles — has also hurt recent performance. Major holdings include Power Corp., ING Canada, SNC-Lavalin Group Inc. and Rogers Communications Inc.

Sharply underweighted in financials, the concentrated Dynamic offering has no exposure to bank stocks, nor does it own any technology companies. The materials sector sits at about 25%. Combined with energy issues, the two sectors comprise more than 80% of the total portfolio, making it somewhat less diversified than many of its competitors. Sehgal’s major holdings include Trican Oilwell Service Co., Teck Cominco Ltd. and EnCana Corp.

@page_break@The Fidelity fund holds little foreign content, and what little there is can be found right across the border. The Dynamic fund, on the other hand, has a much larger exposure to foreign securities — 22% in all, with only a small portion of it invested in the U.S.; almost 6% is in India.

Risk-wise, the funds are quite different. The Fidelity fund posted a five-year standard deviation of 12.3, less than the 14 posted by the index, while the Dynamic fund registered a much higher 18.1.

Folding in returns, the Dynamic fund has a five-year Sharpe ratio of 0.48, which drops it further behind the Fidelity fund’s 0.67, suggesting Lemieux has been the superior stock-picker over the longer term. Although both funds have solid track records, this measure alone suggests the Fidelity offering may be more worthy of support.

More recently, however, the Dynamic fund has closed that gap and outperformed its counterpart sharply, albeit with more volatility.

Both funds are worthy prospects to consider. The Fidelity fund has only been in business for five and a half years, but it enjoys a cost advantage as its management expense ratio is 30 basis points lower than that of the Dynamic fund. IE