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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.

Dominic Rowles - Investment Analyst
28 February 2018

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 250 250
Small Between £250m and £1bn FTSE Small Cap 287
Micro Under £250m FTSE Fledgling 95

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

Brexit negotiations and a fragile government are just two things that made investors worry smaller companies were in for a bumpy ride in 2017. This is because small companies typically carry out most of their business within the UK and have less exposure to global markets than larger firms.

Despite this, UK Smaller companies delivered exceptional returns over the past year and rose 16.4%*, comfortably outperforming the broader stock market which grew 11.3%*. Furthermore, the average fund manager added value for UK-based investors in smaller companies. That said, it should be remembered that past performance is not a guide to the future.

There remain some notable short term challenges to UK smaller companies. Rising inflation, for example, erodes consumers’ spending power, and political uncertainty, which could encourage people to save rather than spend. Both of these factors would reduce the profits, and potentially the share prices, of smaller companies.

These short term challenges have caused some investors to overlook UK smaller companies and, despite their strong recent performance, they remain attractively valued in comparison to many other smaller companies around the globe, in our view. This could present opportunities for experienced fund managers to identify robust businesses at attractive share prices. Please see the ‘Fund Reviews’ tab for commentary on some of our favourite funds in this area.

Looking back over the longer 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 and risk.

Performance of smaller companies vs the wider UK stock market over ten years

Past performance is not a guide to future returns. Source: *Lipper IM to 31/01/2018

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

    +103.6%

  • FTSE Small Cap

    +85.5%

Data correct as at 31/01/18. 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 January 2018. 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 with HL. It is 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 focus their search on the very smallest companies listed on the stock market. These companies offer significant potential for long-term growth, but are higher risk.

This fund is managed by veteran investor Giles Hargreave and co-managers Guy Feld and David Walton. They benefit from the support of what we believe to be one of the most experienced and well-resourced teams investing in UK smaller companies. The fund’s strong performance, both over the long term and over the past year was generated by the team’s ability to consistently select companies with excellent prospects, whilst avoiding those that went on to perform poorly, according to our analysis. We believe this fund could continue to outperform over the long term, although its emphasis on very small companies means performance could be volatile in the meantime.

Giles Hargreave and Eustace Santa Barbara continue their search for high quality businesses, but with the freedom to invest in medium-sized companies, as well as higher-risk smaller ones.

The managers continued their stellar long-term track record over the past year, and the fund significantly outperformed its benchmark. These strong results were driven by the managers’ ability to identify the best opportunities amongst small and medium-sized businesses, while avoiding those destined for failure. Recent investments include US promotional products manufacturer 4imprint. The company benefits from an effective online presence and a fast, convenient customer experience, according to the managers. These are just two of the factors that could see the business significantly increase its presence in the promotional products market, in their view.

Giles Hargreave and Guy Feld favour companies that offer a unique product or service, or a strong brand, which puts them ahead of the competition. Within this fund, they focus on small companies up to £250m in size at the time of purchase.

The fund performed exceptionally well over the past year and returns were primarily driven by the managers’ ability to select companies with outstanding prospects. Their stock selection was particularly strong amongst companies in the consumer goods and industrials sectors, according to our analysis. Recent success stories include company sales specialist K3 Capital, which rose sharply when it released an impressive set of results.

We believe the managers are well placed to make the most of the opportunities on offer and deliver strong returns over the long term, although there are no guarantees.

Dan Nichols and his team undertake detailed analysis of individual smaller companies seeking factors that could lead their earnings to increase significantly. The manager will also tilt the portfolio based on his outlook for the economy.

Returns were strong over the past year and the fund significantly outperformed the broader smaller companies market as a result of the manager’s ability to select the companies with the brightest futures. He particularly added value through his investments in the industrials and financials sectors, according to our analysis. We hold the Old Mutual UK equity team in extremely high regard and believe this fund remains a good choice for long-term exposure to smaller UK businesses, although there are no guarantees.

Dr Paul Jourdan and his team seek financially strong companies with barriers to entry from competition and the ability to pass on rising costs to consumers by increasing prices. This fund is concentrated which is a higher-risk approach.

The fund performed well, both over the past year and throughout the manager’s career, as a result of his ability to invest in companies with strong prospects, according to our analysis. That said, the smaller companies sector is one where we have identified a number of high quality fund managers capable of consistently adding value for investors over the long term. We currently believe there are superior alternatives available to investors and our favourites feature on the Wealth 150.

James Zimmerman looks for financially robust companies where a significant proportion of the business is owned by its managers. He believes this ensures the manager’s interests are strongly aligned with those of long term investors.

James Zimmerman has headed up this fund since June 2015 and has got off to an exceptional start. The fund’s impressive early performance can be attributed to the manager’s ability to select companies with the brightest prospects, particularly within the consumer services sector, according to our analysis. That said, it remains early days in his career and we would like to see how he performs over a longer time period before considering the fund for the Wealth 150.

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Investment notes

Please note the research updates are not personal recommendations to trade. If you are unsure of the suitability of an investment for your circumstances please seek advice. Remember all investments can fall as well as rise in value so investors could get back less than they invest.

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