Why This Star Mid-Cap Fund Likes Ralph Lauren and Planet Fitness
Mid-cap companies are often overlooked by investors, who either stick with large-cap companies or look to small-cap names if they want to diversify. But 2026 may be the year mid-caps come out of the shadows.
Several factors are coming together that could make this year an exciting time for the stock market’s middle child, say Don Peters and Dante Pearson, managers of the $4.4 billion T. Rowe Price Diversified Mid Cap Growth fund.
Compared with large-cap companies, mid-caps generally need more money to grow, so as the Federal Reserve continues its easing cycle, midsize companies often receive an outsize benefit from lowered borrowing costs. The outlook for earnings growth is strong for 2026, and companies that are going public now are often listing as mid-caps—instead of small-caps—having stayed private for longer. Finally, mergers and acquisitions activity could increase because of an accommodating regulatory environment, further giving mid-caps a boost.
Unlike more-volatile small-cap companies still gaining their footing, or large-cap companies unlikely to experience rapid growth, the best mid-cap companies are transforming into higher-margin, higher-return-on-capital businesses. But only about 15 sell-side analysts on average cover mid-cap companies, so many good ones are growing unnoticed, the fund’s managers say.
“That’s one of the many benefits that we appreciate in mid-cap investing,” Pearson says.
Morningstar gives Mid Cap Growth five stars and a silver medal, which means the firm has a high conviction the fund will outperform its index and its peers over a full market cycle on a risk-adjusted basis. The no-load fund charges annual fees of 0.84%, which Morningstar calls below average.
The fund beats its peers across short- and long-term time frames. It has a 14% 10-year annualized return versus peers’ return of 12.1%, putting it in the top 10% of mid-cap growth funds. Mid Cap Growth also beats the Russell Mid Cap Growth index’s 10-year return of 13.3%, net of fees.
Peters has run the fund since its 2003 inception, and Pearson has worked with Peters since joining T. Rowe in 2017, first as an analyst; he was officially named associate portfolio manager in 2024. At the end of December, Pearson will take over as lead portfolio manager, and Peters will leave the fund after a transition. Peters will continue to manage the $1.4 billion T. Rowe Price Tax-Efficient Equity fund. “It will be the most uneventful transition on record because we’ve worked together for years,” Pearson says. “Consistency is the approach.”
The duo seeks steady, long-term outperformance through disciplined stock selection, rather than by timing the market or making big sector bets.
“We want to have companies that we think will grow up to become larger and successful,” says Peters. “Successful companies are good capital allocators, have management teams that execute well, and aren’t overvalued.”
They rely on T. Rowe analysts’ bottom-up fundamental research to find companies trading at discounts relative to their history and that show signs Wall Street is underestimating long-term revenue growth. Peters and Pearson have found over the years that, more than any other metric, the strength of analysts’ expectations is key to how well stocks will perform.
“Nothing always works, but when good news is happening to companies, when numbers are moving up, your hit rate goes up substantially. That’s our focus more than any specific style or [metric],” Pearson says.
They also have sharp risk controls. Every six months they review all their investments, looking at corporate debt levels and revisiting portfolio positioning to map out how each holding correlates with other investments and to estimate how each name would perform during bearish market extremes. Peters says they consider risk management as a contributor to their excess return.
Peters and Pearson let their winners ride to take advantage of compounding, but they will gradually sell when mid-caps graduate to large-caps, using the Russell Mid Cap benchmark cutoff as their guide.
One of the bigger mid-cap names they own is No. 1 holding Howmet Aerospace, which they first bought in 2022. The specialty-parts manufacturer of aerospace components contributed handsomely to last year’s strong performance. It is currently trading at 47 times 12-month forward earnings, which Peters says is somewhat expensive, but it boasts consensus estimates of 23.8% on long-term revenue growth over three to five years.
Mid Cap Growth bought luxury-goods company Ralph Lauren this past summer, and the duo are impressed with how management continues to nurture the brand. It trades at 21.7 times 12-month forward earnings, and long-term revenue growth is estimated at 13.5%.
“They’re playing the long game and are cheaper than the traditional European luxury companies,” Peters says, also pointing out that Ralph Lauren isn’t overly dependent on any one region for growth, unlike some peers that were overexposed to Chinese consumers when that economy softened.
Two purchases in the past 12 months demonstrate how Peters and Pearson think about portfolio composition to keep their roughly 245 holdings diversified.
They bought Encompass Health, the dominant player in the patient rehabilitation hospital market, in June 2024. They expect it to benefit from demographic demand as baby boomers and Gen Xers need services such as joint replacements and have major medical events such as strokes. Costs for these services are cheaper at hospitals like Encompass, Peters says. The stock trades at 18.2 times 12-month forward earnings, with long-term growth estimates around 14.4%. They expect this lesser-known company will be a solid compounder.
Peters and Pearson are impressed by the way Colleen Keating, the relatively new CEO of Planet Fitness, seems to be turning around the company. She was brought on in June 2024, and the duo bought the low-cost gym franchise a month later, with an eye on the trend of healthy living.
“It’s easy to join and quit, so it’s not a roach motel for customers,” Peters says, noting that it trades at 29.2 times 12-month forward earnings, with growth estimates at 15.6%.
Mid Cap Growth’s portfolio is intentionally structured to prevent a few holdings from dominating returns. That diversity also helps the portfolio perform in various economic environments, the duo says. With its focus on valuation, the fund tends to lag behind its peers when market leadership is driven by speculative or risk-seeking markets, or when markets are driven strongly by momentum.
While they see 2026 as being a good year for mid-caps, Peters and Pearson don’t take views on the economy, market direction, or other macroeconomic calls as they look for potential new holdings.
“We generally just try to find low-cost producers that have good capital allocation,” Peters says.
