Small and medium-sized companies punch above their weight. They’ve got bags of room for growth and research shows they normally grow faster than larger ones over the long term. There’s no guarantee of that though. They’re also more volatile so there will be more ups and downs in performance along the way,
There are many different ways to capture the potential growth. Fund managers can invest in everything from well-established industry stalwarts to new and innovative ‘micro caps’ at the smallest end of the size spectrum. Some managers hold onto small companies as they grow into bigger ones. Others sell them once they reach a certain size and look for the next opportunity.
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||£1.4bn - £135bn||Large||101|
|FTSE 250||£185m - £4.5bn||Medium||250|
|FTSE Small Cap||£30m - £750m||Small||282|
|FTSE Fledgling||£1m - £170m||Micro||95|
|FTSE AIM||£0 - £3.3bn||Micro to large||784|
Source: www.ftse.com as at 30 April 2019
Our view on the UK smaller and mid-sized companies sector
Small companies in the UK can be among the most exciting 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.
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 have the greatest 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, 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.
The past 12 months were tough for UK small and mid-sized companies. Market volatility at the end of 2018 hit them particularly hard. While the stock market as a whole fell, they dropped more than larger companies. While bigger businesses have recovered well since then, the FTSE 250 index only gained 0.5% in the 12 months to 30 April 2019. The FTSE Small Cap (excluding investment trusts) index is yet to make back the losses. It’s 5.3% behind where it was a year ago. That’s not unusual for smaller-sized companies – they’re more volatile so there will be more ups and downs in performance.
Market volatility aside, many investors are still wary of UK smaller companies. That’s largely down to Brexit. While it seems investors are becoming less nervous about its potential impact, uncertainty still remains. As small and medium-sized companies normally do more business in the UK than larger ones, they’re more likely to be affected by a potentially bad outcome for the UK.
We prefer to invest with longer time horizons though. And over the long term, small and mid-sized companies have normally done better than large ones. We expect them to carry on outperforming big companies in the long term, but with more volatility and risk. There are no guarantees though. Remember past performance isn’t a guide to the future.
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 30/04/2019
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. Litigation finance business Manolete Partners, for example, has grown 164% since the managers invested in it in December 2018. That’s one of many companies that’ve contributed to the fund’s excellent long-term performance. 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.
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, so this reduces the risk of one of two bad performances having a big impact on the fund. Over the past 12 months, however, many of the fund’s companies did poorly, so it made a loss. It still beat its benchmark though, which fell further. This is a short period of time to judge performance. We think it’s best to consider the longer term, and believe the managers will resume their long-term record of superb performance, although there are no guarantees.
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 struggled to perform over the past 12 months though, so did the fund. Both barely eked out a gain, although past performance doesn’t indicate future returns.
Dan Nickols considers what’s going on in the economy more than most other smaller company fund managers when making his investment decisions.
The manager often invests in companies at the larger end of the small company scale. He’ll also stay invested as they grow into large companies if he thinks they’ve still got room to grow. Nickols takes what’s going in the UK economy into account when deciding which small companies to add to the fund. That approach has helped the fund beat the benchmark over the past 12 months, although it still fell slightly. His long-term record is impressive though and we think Nickols is a talented fund manager.
Rather than invest in companies based on potential alone, Harry Nimmo looks for ones that’ve already become successful and have bright futures.
The manager invests in companies with proven growth, rather than back ones based on potential alone. He’ll often stay invested in companies as they grow rather than take profits and look for the next opportunity. That makes his average company larger than many other small company fund managers. The manager has the flexibility to use derivatives to help him invest, which if used adds risk.
The strategy’s delivered excellent results, over both the long and short term. In the past 12 months the fund’s grown a good deal more than the FTSE Small Cap index. A big part of that is down to strong performance from consumer service companies. Future performance though could be different.
Managers Luke Biermann and Iain Staples invest in a small number of companies so each one can make a big impact on the fund’s performance.
The managers can invest in the smallest 10% of the UK stock market. They like innovative companies with strong brands. They also seek ones they think are resilient to change. This gives them confidence the businesses are likely to remain competitive for many years. Investing in a small number of companies, as they do, increases risk. The managers took over the fund in 2017, and performance since then has been broadly in line with the benchmark. Investments in industrial companies have been their standout performers.
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.