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UK Smaller Companies

UK Smaller Companies sector

Funds will focus on companies which form the smallest 10% of the UK stock market. These range from micro businesses to medium-sized companies.

Heather Ferguson - Investment Analyst
01 June 2016

In simple terms, large companies are generally those within the FTSE 100, medium-sized companies are those within the FTSE 250 and around the next 300 smallest form the FTSE Small Cap Index. The FTSE 350 combines the FTSE 100 with the FTSE 250.

Market cap of company Index Number of constituents
Mega over £20bn FTSE 100 FTSE 350 101
Large Between £5bn and £20bn
Medium Between £1bn and £5bn FTSE 250 251
Small Between £250m and £1bn FTSE Small Cap 287
Micro Under £250m FTSE Fledgling 102

Funds within the IA UK Smaller Companies sector must have at least 80% of their value invested in companies which form the smallest 10% of the UK stock market, which can range from micro businesses to medium-sized companies.

Our view on the UK Smaller Companies sector

Smaller companies tend to be dynamic, adaptable, and keen to develop their presence in fast-growing industries. Innovations such as the internet have enabled smaller companies to level the playing field with larger rivals creating opportunities to expand and attract new customers. We therefore believe their long-term growth prospects are compelling.

Some will blossom into the giants of tomorrow, but some will struggle or fail altogether. Unlike larger companies such as Tesco or Vodafone, which might have dozens of analysts poring over their accounts, smaller companies tend to be under researched. They might only have one or two analysts covering them which creates opportunities for eagle-eyed fund managers to spot hidden gems.

Investment notes

Please remember past performance is not a guide to future returns. Where no data is shown, figures are not available. This information is provided to help you choose your own investments, remember they can fall as well as rise in value so you may not get back the original amount invested.

Our favourite funds in this sector

First-class performance potential and low management charges

View the Wealth 150

It has been a turbulent year for the UK stock market, which has fallen 6.6% in the year to 1 June 2016. Against this backdrop, the performance of smaller companies (-2.3%) is relatively strong.

Smaller companies usually suffer more than their larger counterparts in periods of uncertainty due to their higher-risk nature and they tend to be more volatile than their larger counterparts. However over the past year the reverse has been true, although this should not be seen as guide to future returns.

A large portion of the FTSE 100 comprises oil, gas and commodity companies - all areas which have experienced a torrid time over the past year. Many of these companies also have a high level of global exposure and the market has therefore reacted strongly to worldwide news such as the slowdown in China. In contrast, small and medium-sized companies tend to be more domestically focused, with performance more closely linked to the UK economy. UK funds with a bias towards smaller businesses have therefore tended to outperform those with a larger company focus.

Performance of UK smaller companies over the past year

Source: Lipper IM to 01/06/2016. Past performance is not a guide to future returns.

Annual percentage growth
June 11 -
June 12
June 12 -
June 13
June 13 -
June 14
June 14 -
June 15
June 15 -
June 16
FTSE All-Share -8.5% 30.6% 10.2% 6.8% -6.6%
FTSE Small Cap -10.2% 39.6% 17.6% 9.5% -2.3%

Small, medium and large companies can be split into those with a high yield and those with a low or zero yield. Over the past year, small high-yielding stocks have outperformed both high-yielding and low-yielding medium and large companies, according to our analysis. UK larger companies have had the worst performance.

Performance of low yield vs. high yield relative to the UK stock market

This is a relative chart - when the line is rising, the sector is outperforming the UK Stock Market, when the line is falling, it is underperforming.

Our analysis has shown that over the long term, the total return from investing in companies that pay meaningful dividends is significantly better than those achieved by low or non-dividend payers. On average, large, medium and small high-yielding companies have all outperformed their lower yielding counterparts over the long term.

Share prices of smaller companies have experienced varying fortunes over the past decade. During the 2008 financial crisis, smaller companies fell further than their larger counterparts but went on to outperform during the subsequent recovery. Over the long term, we would expect smaller companies to outperform their larger counterparts but with a higher level of volatility.

Investment notes

Please remember past performance is not a guide to future returns. Where no data is shown, figures are not available. This information is provided to help you choose your own investments, remember they can fall as well as rise in value so you may not get back the original amount invested.

Five year performance

  • IA UK Smaller Companies

    +62.6%

  • FTSE Small Cap

    +57.7%

Data correct as at 01/06/16. Please remember past performance is not a guide to future returns.

Our favourite funds in the sector

We undertake a comprehensive review of every sector. Here we provide comments on a selection of funds of interest following our most recent UK Smaller Companies sector review. They are provided for your interest but are not a guide to how you should invest. If you are unsure of the suitability of an investment for your circumstances seek personal advice. Comments are correct as at June 2016. Remember all investments can fall as well as rise in value so investors could get back less than they invest. Past performance is not a guide to the future.

To view a full list of our favourite funds within the sector, visit the Wealth 150. There is a tiered charge to hold funds in the Vantage Service with a maximum of 0.45% p.a. - view our charges.

Source for performance figures: Financial Express

The fund focuses on the smallest investable companies up to £250m in size. Long-term returns have been driven primarily by positive stock selection.

The Marlborough Nano-Cap Growth Fund has encountered a period of lacklustre performance over the past year relative to the FTSE Small Cap Index. Stock selection has been strong but performance has been held back by a high exposure (68% of the fund) to small low-yielding companies, which have underperformed their higher-yielding counterparts. The managers’ long-term track record is exceptional and recent weakness could be taken as an opportunity to top-up a position for a reduced price.

The fund focuses on very small companies up to £1billion in size. Returns have been driven primarily by positive stock selection.

The Marlborough Micro-Cap Growth Fund has comfortably outperformed the FTSE Small Cap Index over the past year, which our analysis attributes to strong stock selection. A lower exposure, relative to the index, to financial and mining companies also aided performance. The fund is biased to very small companies, with around 70% invested in those less than £250m in size. A further 22% is invested in slightly larger smaller companies up to £1 billion in size, with the remainder held as cash.

The fund invests in both small and medium-sized companies. Returns have been driven primarily by positive stock selection.

Performance over the past year has been strong with the fund comfortably outperforming the FTSE Small Cap Index. Strong stock selection, particularly within the consumer and industrial sectors, was the main driver of returns, according to our analysis. The long term performance of the fund is exceptional and the fund has recovered from a tougher period between December 2011 and September 2013.

The fund invests in both small and medium-sized companies. Positive stock selection is the key driver of performance while sector positioning has detracted from returns over the long term.

The fund has comfortably outperformed the Numis Smaller Companies (-Inv Trust) Index over the past year. This can be attributed to a relatively low exposure to the oil & gas and mining sectors and the manager's good stock picking within the financial and consumer sectors, according to our analysis. Since 2011 the manager has markedly increased the fund's smaller company exposure. This reversed slightly over the past year as he increased exposure to medium-sized companies to around 57% from 52% the previous year. The fund has outperformed the sector over the past year and the manager's has a good long-term track record.

The fund invests in both small and medium-sized companies. Returns have been driven by both positive stock selection and good sector positioning.

Performance has been good over the past year with positive stock selection contributing to the fund's outperformance relative to the Numis Smaller Companies (-Inv Trust) Index. The manager has had considerable exposure to medium-sized companies over the past five years but has recently been diversifying back into the lower end of the market. We view the manager's move back into smaller companies positively as this is historically where he has added most value.