Small and medium-sized companies can punch above their weight. They’ve got bags of room for growth and research shows they normally grow faster than larger businesses over the long term . There’s no guarantee of that though. Their share prices can also be more volatile so there will be more ups and downs in performance along the way.
There’s great variety in small and medium-sized company investing. The sector covers everything from well-established industry stalwarts to new and innovative ‘micro caps’ at the smallest end of the size spectrum.
There are hundreds of small and mid-sized companies in the UK. The larger ones are found in the FTSE 250 index. These are the next 250 largest companies in the UK after the FTSE 100. Sliding down the size scale you’ll find the FTSE Small Cap and FTSE Fledgling indices. The FTSE AIM index contains a mix of medium, small and micro-sized businesses.
|Index||Approximate market cap||Size||Number of companies|
|FTSE 100||£1.3bn - £120bn||Large||101|
|FTSE 250||£170m - £5.1bn||Medium||250|
|FTSE Small Cap||£35m - £650m||Small||277|
|FTSE Fledgling||£0m - £135m||Micro||102|
|FTSE AIM||£0m - £2bn||Micro to large||762|
Source: www.ftse.com as at 31 October 2019
Our view on the UK smaller and mid-sized companies sector
Small companies in the UK can be among the most exciting businesses around. Some are pioneers of emerging industries, and adapt quickly to new opportunities.
Mid-sized companies are often seen as the investing ‘sweet spot’. They’re usually at a later stage of growth, so can be less volatile than their smaller peers. But they still offer higher potential for growth than large companies.
We think the long-term prospects for both small and mid-sized companies are compelling. Some could grow rapidly or blossom into the giants of tomorrow. But others will struggle or could even go bust.
Smaller companies are higher-risk investments than larger ones. When markets go down, it’s usually smaller companies that suffer the most. Their shares are also harder to buy and sell – or ‘less liquid’. That’s because there are fewer buyers and sellers of smaller companies’ shares.
Opportunities for active managers
There are lots of excellent fund managers investing in these companies. Many are among the best long-term performers across all sectors, not just in this area of the market. Fortunately for them, small and medium-sized companies are often under-researched. That creates lots of opportunities to uncover hidden gems. We think this is an area where managers can have a great stock-picking edge.
It adds up to an enticing prospect. Companies with some of the biggest potential for long-term growth and some of the country’s finest fund managers to invest in them. If you’re happy to accept the greater risks, we think investing in UK small and mid-sized companies can add some excellent long-term growth potential to your portfolio. With the added volatility though, you should consider investing in these companies as part of a diversified portfolio.
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.
UK smaller companies continued to struggle recently. On the whole they’ve not made any gains over the past 12 months. Brexit worries had previously held back both small and medium-sized companies, as they tend to do more of their business in the UK than their larger, often multinational peers. Medium-sized companies have done relatively well over the past year though. Since the volatility at the end of 2018, the FTSE 250 index has caught up with and overtaken the FTSE 100.
So what’s holding smaller companies back?
Ten former FTSE 250 companies, including Metro Bank, Sirius Minerals, Kier Group and Indivior fell by more than two-thirds over the past 12 months, and dropped into the FTSE Small Cap index. They’re still fairly big companies by UK small cap standards though, so they’ve had a large negative impact on the index’s return. Additionally, many UK investors have become more nervous about the reduced liquidity in the smaller company sector.
We think liquidity should be a consideration for investing in smaller companies. But we also think higher-than-usual liquidity concerns, coupled with ongoing Brexit uncertainty, have been hampering their returns. Over time we expect the full potential of small and medium-sized companies to be recognised, although there are no guarantees.
Performance of UK small and medium-sized companies vs the broader UK stock market
Past performance is not a guide to the future. Source: Lipper IM to 31/10/2019
Our favourite funds in the sector
These funds invest in small and mid-sized 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.
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 fund specialises in medium-sized UK businesses. The manager considers both the economic outlook and the pros and cons of individual businesses when choosing which companies to invest in.
Paul Spencer invests in companies listed on the FTSE 250 index, often from unfashionable sectors. That’s where he thinks he can find opportunities many other investors have overlooked. He doesn’t invest in many companies, so each one can make a big difference to how the fund performs. This can be either a good or bad thing, depending on how well the companies do. The fund’s done better than the FTSE 250 index over the past 12 months. This is a short period of time and not a guide to the future though. Spencer takes a much longer-term view of a company’s prospects.
The managers invest in some of the very smallest companies in the UK stock market. That’s where they think some of the biggest opportunities for growth can be found.
Companies as small as the ones Giles Hargreave and Guy Feld invest in are often ignored by other fund managers. That gives them an opportunity to uncover some hidden gems. Companies at this end of the company scale have much more room to grow. Combined with Hargreave’s and Feld’s stock-picking skills, the fund’s long-term performance has been excellent. It’s also done well recently considering how poorly UK smaller companies have done over the past 12 months. That’s not a guarantee of future performance though. This fund includes some investments in unquoted companies.
Giles Hargreave and Guy Feld invest in a large number of small UK companies that they think have bags of growth potential.
The fund has one of the strongest teams in the UK small companies sector behind it. That’s essential as the managers invest in a very large number of businesses. As small companies can be volatile, this reduces the risk of one or two bad performances having a big impact on the fund.
Returns over the past 12 months have been fairly lacklustre. The fund’s nevertheless beaten the FTSE Small Cap (excluding investment trusts) index. This is a short period of time to judge performance though. We think it’s best to consider the longer-term, and expect the managers to resume their long-term record of superb performance, although there are no guarantees. This fund includes investments in unquoted companies.
The funds aims to track the performance of the FTSE 250 index as closely as possible, by investing in the same companies as the index and in the same proportion.
Tracker funds are a low-cost and convenient way to invest. Rather than employ managers and analysts to try to beat the market, they keep costs low and simply aim to match the performance. The fund’s done a good job at that. We think it’s a good way to invest in a large number of medium-sized UK companies. As the FTSE 250 index has performed well since the market falls at the end of 2018, so did the fund. Remember past performance doesn’t indicate future returns.
Richard Watts combines both economic predictions and views on companies to choose those he thinks have the best prospects.
The manager invests in profitable medium-sized UK companies he thinks have future growth potential. If they fulfil his expectations, he’ll stay invested as they grow into larger companies. If they fall short though he’ll sell them quickly and move on to the next opportunity. Watts invests in a small number of companies, so the performance of each stock, good or bad, can have a greater impact on fund’s performance. Over the long term he’s done well and we think he has the potential to do so in future. There are other successful UK mid cap funds offered at a lower cost though. This fund includes investments in unquoted companies.
Anthony Cross, along with co-managers Julian Fosh, Victoria Stevens and Matthew Tonge, like smaller companies with managers who are also owners of the business.
The managers seek companies that reinvest their profits to grow the business, and repeat the cycle over and over. They also like company directors to have a stake in the business, so they’ll run it in a way that benefits shareholders. The fund’s long-term performance has been excellent, though there’s no guarantee this will continue. We think Cross is a talented manager but in our view there are other excellent managers in the sector with lower-cost funds.
Latest research updates
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.
Our expert research team provide regular updates on a wide range of funds.