At first glance, active mid-growth funds hit it out of the park: In the trailing year through Oct. 27, 2025, the average fund in the category gained 15.2%. However, that lagged the Russell Midcap Growth Index by nearly 6 percentage points—making for one of the largest margins of underperformance of any of the nine Morningstar US stock fund categories in the last year.
A big culprit was index concentration, which has given mid-growth managers tougher competition. From September 2022 to September 2025, the number of holdings in the Russell Midcap Growth Index fell from 407 to 281, while the percentage of assets in its top 10 holdings increased from 12.0% to 21.5%. While concentration has been common in large-cap investing, it’s a new dynamic in the mid-cap space and not seen during most managers’ professional lifetimes. It’s reminiscent of the dot-com era when owning (or not owning) a handful of high-flying stocks would make or break relative performance. The upshot of index concentration is that each constituent matters more. Mid-growth managers must now contend with errors of omission, that is, stocks that drive overall index performance and which managers must get right in order to avoid looking out of step.
This Time Isn’t Different
The latest highflyers were communication-services firm AppLovin APP and software firm Palantir PLTR. In the last year, both roughly quadrupled in value and grew to peak weightings in the Russell Midcap Growth of about 3.0% and 9.0% of assets, respectively, before they left the index in June 2025. Together, they accounted for nearly 40% of the index’s 21.0% gain in the last year, with average price/earnings ratios of roughly 100 times for AppLovin and 600 times for Palantir.
These valuations were unpalatable to many managers, particularly those with a growth-at-a-reasonable-price philosophy, who are weary of paying huge multiples for prospective growth that might not materialize. They faced a dilemma: compromise their approach to manage benchmark risk or stay disciplined and potentially underperform.
Here’s what a few mid-cap growth managers did, which ran the gamut from resolute avoidance to restrained resignation—leading to various degrees of relative performance.
Staying true to its approach weighed on Champlain Mid Cap CIPMX, which earns High People and Process ratings. Lead manager Scott Brayman and his team stand out for their relentless focus on durable businesses with leading and defensible competitive positions, low obsolescence risk, and steady, reliable growth. Merely rapid or prospective growth, especially when coupled with high valuations, is outside their wheelhouse. Thus, avoiding Palantir and AppLovin was consistent with their approach, though it contributed to notable underperformance. In the last year, the strategy trailed the index by double digits and landed in the mid-growth category’s bottom quartile.
Janus Henderson Enterprise JAENX, which earns Above Average People and Process ratings, aims to get ahead over the long run by losing less in drawdowns. Managers Brian Demain and Cody Wheaton limit losses by avoiding stocks whose prices they think reflect unrealistic growth expectations, and they put Palantir in that category. Not owning it accounted for the bulk of the fund’s underperformance in the last year, which trailed the index but landed near the middle of the category pack. The strategy benefited from a small stake in AppLovin that the managers bought in mid-2024, though they trimmed it as it grew into a larger position in the portfolio to keep its absolute weight in the portfolio at reasonable levels. They continued to own it after it left the index in June 2025.
Touchstone Mid Cap Growth TEGAX, which has Above Average Process and Average People ratings, has been managed by longtime subadvisor Westfield Capital Management. The team looks for businesses with accelerating earnings and cash flow to fund growth while also minding valuations. The team avoids making big sector and industry bets to let stock-picking lead the way. In that spirit, they added Palantir to the portfolio in 2024’s second quarter and AppLovin in the fourth quarter of that same year to reduce active underweighting in these names and mitigate benchmark headwinds, though they remained underweight both owing to their high valuations. Results during the last year were more competitive versus peers who generally had less (or zero) exposure to both stocks, landing them in the category’s top quartile and essentially matching the index. The managers sold both stocks in June 2025.
A Better Benchmark
Despite both names leaving the Russell Midcap Growth Index in the June 2025 reconstitution, their impact will be felt for years to come, given their huge contributions to performance. Furthermore, if Palantir and AppLovin crash at some point in the future, prescient managers will still be penalized (on a relative basis) for not owning them during their ascent despite correctly predicting and avoiding their downturn.
Starting in 2026, Russell will shift from an annual to a semiannual reconstitution cycle. More frequent reconstitutions could make concentration issues less acute by moving high-flying stocks out of the mid-cap index (and into large-cap) before they gain an outsize share, though it won’t necessarily prevent these issues from arising again. Therefore, managers will need to be willing to mitigate large active underweights or stick to an effective long-term process even when it hurts.
Investors can also use indexes that didn’t suffer the same concentration issues. One example is the Morningstar US Mid Cap Growth Broad Index. It has a similar number of holdings to the Russell Midcap Growth, but just 13.0% of assets in its top 10 holdings versus 21.5% for the Russel Midcap Growth. Palantir and AppLovin also accounted for much lower stakes; their weightings peaked around 2.5% and 1.0% of assets, respectively, owing to a long-standing semiannual reconstitution and quarterly rebalancing, which keeps the index representative of its broad asset class.
