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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 April 2017

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 283
Micro Under £250m FTSE Fledgling 97

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 so they are higher risk. 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

Small and medium-sized companies tend to be more domestically-focussed than larger firms. As such, they fell sharply in the immediate aftermath of the UK’s vote to leave the European Union as investors worried about the impact Brexit would have on the economy. Although these initial losses were quickly recovered, small and medium-sized companies have lagged their larger counterparts over the past year, returning 19.7% and 15.3% respectively, compared with 23.3% for larger firms.

Unlike larger companies, which generate around 80% of their revenue overseas, small and medium-sized companies sell the majority of their products and services to UK customers. This has affected the perceived outlook for smaller businesses in two ways. Firstly, they benefit less from weaker sterling, which boosts the value of overseas earnings, and could see the cost of imported components rise. Secondly, rising inflation coupled with low wage growth could negatively impact disposable incomes for UK residents – reducing the amount they are able to spend on goods and services.

However, not all smaller companies are created equal. In an uncertain environment, it is even more important to entrust investment in this area to an experienced fund manager who has the proven ability to uncover those able to perform well despite a more difficult outlook. Please see the ‘Fund Reviews’ tab for commentary on some of our favourite funds in this area.

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 and risk.

Performance of smaller companies relative to the wider UK market over five years

This is a relative chart - when the line is rising, smaller companies are outperforming the UK Stock Market, when the line is falling, it is underperforming. Past performance is not a guide to future returns.

Source: Lipper IM to 31/03/17.

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

    +93.39%

  • FTSE Small Cap

    +97.55%

Data correct as at 31/03/17. 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 April 2017. These funds invest in smaller companies, which are higher risk than their larger counterparts. 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.

Other funds in the sector

Here we look at some other funds of interest following our most recent sector review. Please note the review may be over a short time period and past performance is not a guide to future returns.

Source for performance figures: Financial Express

The managers of this fund seek underappreciated and undervalued companies at the smallest end of the stock market.

Giles Hargreave is a seasoned stock picker and he has the backing of what we believe to be one of the best-resourced teams for UK smaller company investing. This fund is managed in a similar vein to the team's existing smaller company funds, but this is a smaller and nimbler portfolio where emphasis is placed on the UK's smallest companies.

The fund’s performance from launch in October 2013 to mid-2016 was lacklustre. Since this time, the UK Smaller Companies market has made strong gains and a number of long-standing positions in the portfolio have performed well as their potential has begun to be recognised by other investors. As such, performance over the past year has improved and the fund has outperformed its benchmark. Long-term returns have been driven primarily by positive stock selection.

The fund invests in both small and medium-sized companies.

Giles Hargreave invests in companies that provide niche products or services, which are typically able to pass on rising costs to consumers through raising prices. As such, these companies could prove resilient in an environment of rising inflation.

The fund’s performance was hurt in the weeks following the UK’s decision to leave the European Union, although much of these losses were recouped over the following months and the fund performed in line with its benchmark over the year. The fund’s low exposure to the financial sector, which performed poorly, and high weighting to technology, which performed well, aided returns.

The long term performance of the fund remains exceptional and the managers’ strong stock selection has added considerable value for investors, according to our analysis.

The fund focuses on small companies up to £250m in size at the time of purchase. Long-term returns have been driven primarily by positive stock selection.

This fund invests in some of the smallest listed companies in the UK market. We view this as an under-researched area where shrewd fund managers have the opportunity to add significant value for investors over the long term.

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 strong long term performance of the fund can be attributed to the manager’s strong stock selection, according to our analysis.

The fund invests in both small and medium-sized companies. Positive stock selection is the key driver of performance over the long term.

The manager’s strong stock selection, particularly his investments in the consumer goods and services sectors, has added value for investors over the past year. The fund has performed well over the past year despite a short period of underperformance in the weeks following the UK’s decision to leave the European Union.

Investing in under researched smaller companies takes real stock picking skill and Daniel Nickols has a proven track record in this regard; his stock selection has added considerable value for investors over the long term. The manager runs a concentrated portfolio, which means each position can have a greater impact on performance but is a higher-risk approach.

The fund invests in companies at the lower end of the market capitalisation spectrum. Positive stock selection has been the key driver of returns over the long term.

Schroders have appointed Luke Biermann as manager of the Schroder UK Dynamic Smaller Companies Fund with immediate effect. He will work closely alongside existing managers Paul Marriage and John Warren until they leave Schroders in September to set up their own boutique fund management business. The fund was removed from the Wealth 150 on the news of their departure.

Luke Biermann has co-managed the Schroder European Smaller Companies Fund, with the support of Andy Bough, for five years, although we consider this to be a relatively short track record. The fund performed well over his tenure and our analysis suggests the managers added value through their strong stock selection over this time. However, Luke Biermann does not have experience of running a fund alone, or of dedicated to UK smaller companies.

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

The fund’s performance has been weak over the past year, underperforming both its benchmark and the peer group. This is due in part to a recovery in commodity prices as Harry Nimmo has avoided commodity-related companies. However, he feels the recovery will be short lived and is happy to invest elsewhere. He is currently positive in his outlook for a wide range of areas, which include food & beverage, IT, media and consumer companies. His focus remains on identifying quality companies with a strong competitive edge and predictable growth. The long-term performance of the fund remains exceptional.

The manager has the ability to invest in derivatives which, if used, adds risk.

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

The manager focuses on quality businesses with strong balance sheets which he believes are capable of self-help rather than being overly reliant on the wider economy to stimulate growth.

The fund significantly underperformed its benchmark in the weeks following the UK’s decision to leave the European Union; however, these losses were recovered over the following few months to finish the year to end of March 2017 ahead. The fund’s bias to small, rather than medium-sized businesses, aided returns as the former outperformed over the period.

The manager’s good stock selection, particularly in the consumer services and industrial sectors, also aided returns. Although we feel Jonathan Brown is a capable manager, we do not feel the fund's long term performance has been strong enough to be considered for the Wealth 150 list of our favourite funds across the major sectors.

The fund invests in companies at the lower end of the market capitalisation spectrum with the majority invested in businesses worth under £500m.

Weak sterling has pushed up the price of imported goods which could put pressure on the profitability of smaller companies that rely on imported components. Mark Niznik looks to invest in companies that can pass on increased costs to their customers through raising prices.

The fund outperformed the benchmark and its peer group over the past year, which our analysis attributes to good stock selection. However, over the longer term Mark Niznik’s stock selection has been inconsistent, and do not feel the fund warrants a position on the Wealth 150 list of our favourite funds across the major sectors.

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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.

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