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UK Small & Mid-sized Companies sector

Funds will focus on UK companies outside the FTSE 100 index. Mid-sized companies are normally found in the FTSE 250 index. Smaller companies form the smallest 10% of the UK stock market.

Jonathon Curtis - Investment Analyst
28 July 2020

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 large, medium, small and micro-sized businesses.

Index Approximate market cap Size Number of companies
FTSE 100 £1.5bn - £110bn Large 101
FTSE 250 £19m - £3.9bn Medium 251
FTSE Small Cap £10m - £603m Small 263
FTSE Fledgling £1m - £96m Micro 96
FTSE AIM £0m - £3.5bn Micro to large 730

Source: www.ftse.com as at 30 June 2020

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’, which increases risk as fund managers could be forced to sell at lower price than they would like, or experience restricted trading. 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 invest in these companies as part of a diversified portfolio.

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.

Wealth Shortlist funds in this sector

Funds chosen by our analysts for their long-term performance potential

See the Wealth Shortlist

UK companies of all sizes have suffered recently. Over the past 12 months, all the main UK indices are in double-digit negative territory*, while the rest of the global stock market has largely recovered from the ‘corona-crash’ and is back into the black.

As is usually the case when markets take a tumble, smaller companies fell furthest. Small-to-medium-sized businesses are often less resilient to economic shocks than larger ones and so investors tend to seek out the perceived relative shelter of larger, more stable companies during crises.

Both the FTSE 250 and FTSE Small Cap indices dropped more than 40% in the space of a month from when the volatility started in February. Their high exposure to some of the hardest hit sectors like travel and leisure, and low exposure to sectors that held up relatively well like healthcare and utilities, meant they fared particularly badly. The FTSE 100 by comparison ‘only’ fell around 30%.

The sharp declines were quickly followed by swift rises though, as fears about the long-term impact of the virus and the economic consequences of lockdown subsided, largely due to huge government intervention. Both the FTSE 250 and Small Cap indices have risen over 30% since their troughs in mid-March*, although they’re still a way off from their pre-crisis peaks and this is a very short period of time to look at.

The past few months have been a stark reminder why smaller companies are higher-risk than larger ones, and investors should be prepared for higher volatility. Investors willing to tolerate this have generally been rewarded over the long-term, although there’s no guarantee of that in the future.

A decade of UK stock markets

Past performance is not a guide to the future. Source: Lipper IM *to 30/06/2020

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 Wealth Shortlist features a number of funds from this sector, selected by our analysts for their long-term performance potential. The Shortlist is designed to help investors build and maintain diversified portfolios. To use the Shortlist, you should be comfortable deciding if a fund fits your investment goals and attitude to risk. For investors who don't feel comfortable building and maintaining their own portfolio we offer ready-made solutions, which are aligned to broad investment objectives. For those who want extra help, you can also ask us for financial advice.

The fund reviews below are provided for your interest but are not a guide to how you should invest. For more information, please refer to the Key Investor Information for the specific fund. Remember all investments can fall as well as rise in value so you could get back less than you invest. Past performance is not a guide to the future.

There is a tiered charge to hold funds with HL. It is a maximum of 0.45% a year – view our charges. Comments are correct as at 30 June 2020. Each of the funds below invest in smaller companies. Remember investing in smaller companies is higher risk than investing in larger companies.

Wealth Shortlist fund reviews

Source for performance figures: Financial Express

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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.

Richard Bullas invests in companies listed on the FTSE 250 (excluding investment trusts) 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, but this is higher risk than a more diversified approach.

The fund’s fallen roughly the same as the benchmark since the beginning of the year, although this is a very short period of time. Over the long-term the fund’s performance has been excellent, significantly outperforming the index. Remember past performance isn’t a guide to the future.

The long-term returns, however, are largely down to the previous manager Paul Spencer, who Bullas recently took over from following Spencer’s decision to retire. Bullas had worked closely with Spencer for several years though, and we think he’ll be able to build upon the fund’s strong long-term record, although there are no guarantees.

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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.

The portfolio has held up much better than the FTSE Small Cap (excluding investment trusts) index since the start of the year, although this is a short time period. Doing better than the benchmark during market wobbles has been key to the managers’ superb long-term returns. That’s no guarantee of future performance though.

Hargreave recently announced he’ll stop co-managing the fund in 2021. Feld and Eustace Santa-Barbara, who co-manages another UK smaller companies fund with Hargreave, will then jointly run it. Although Hargreave stepping back is disappointing, we’re pleased he’ll still be involved in company research and analysis, and think Feld and Santa-Barbara will continue to run the fund along similar lines.

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The fund aims to track the performance of the FTSE 250 including investment trusts index as closely as possible.

The fund invests in all constituents of the FTSE 250 index, and in the same proportion. As this also includes the investment trusts of the index, many of which invest overseas, it gives the fund more international exposure than an ex-investment trusts equivalent. That’s been a positive recently, as companies overseas have on the whole performed better than those in the UK. That doesn’t indicate future performance though.

The team at HSBC have done an excellent job of tracking the index over the long-term, in no small part by keeping costs low. We think the fund is a simple and convenient option for investing in a broad range of medium-sized UK companies and investment trusts.

The team that runs this fund invests in all the businesses of the FTSE 250 index, but doesn’t invest in the investment trusts within the index.

This index tracker fund aims to closely mirror the FTSE 250 excluding investment trusts index. As many of the 60 or so investment trusts in the wider index invest outside the UK, this means the fund offers a purer exposure to medium-sized UK businesses.

Over the long term the FTSE 250 ex-investment trust index has done better than the full FTSE 250 index more often than not, although past performance isn’t a guide to future performance. Given how the UK has fared compared to the rest of the world recently, the ex-investment trust index lagged the wider mid-cap index over the past 12 months.

Legal & General is one of the largest and best-resourced providers of index tracker funds in the UK, and has shown skill at closely tracking the funds’ respective indices. This fund is a relatively new one, having launched in 2017, but we think the team behind it will do an equally good job over the long term, although there are no guarantees.

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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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