Investing in UK small and mid-sized companies provides exciting opportunities for adventurous investors. Research shows these companies normally grow more than larger ones over the long term. There’s no guarantee of that though, and they’re are also riskier than larger ones.
Small and mid-sized companies come in lots of different shapes and sizes. Some fund managers focus on medium-sized ones at the upper end of the size scale. Others invest at the smallest end of the spectrum, known as ‘micro caps’. 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, found in the FTSE 250, FTSE Small Cap, FTSE Fledgling and FTSE AIM indices. They cover lots of different industries, and some are still at an early stage of their life.
|Index||Approximate market cap||Size||Number of companies|
|FTSE 100||£2bn - £150bn||Large||100|
|FTSE 250||£150m - £5bn||Medium||250|
|FTSE Small Cap||£50m - £750m||Small||286|
|FTSE Fledgling||£1m - £145m||Micro||105|
|FTSE AIM||£0 - £4bn||Micro to large||807|
Our view on the UK smaller and mid-sized companies sector
Small companies in the UK can be among the most innovative and exciting around. They can be pioneers of an emerging industry, and adapt quickly to new opportunities.
Mid-sized companies are usually at a later stage of growth. So they can be less volatile than smaller ones, but 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 will blossom into the giants of tomorrow. But others will struggle or could even go bust, so they are higher risk.
There are many excellent UK small and mid-sized companies fund managers. Some are among the best long-term performers across all sectors, not just in this area of the market. Fortunately for them these companies are often under-researched. This creates lots of opportunities to spot hidden gems. That’s why we think this is where lots of managers have the greatest stock-picking edge.
It’s 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 risks, we think investing in UK small and mid-sized companies can add some excellent long-term growth potential to your portfolio. There’ll likely be more ups and down along the way than with larger companies. Therefore you should consider investing in UK small and mid-sized 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.
Uncertainty surrounding Brexit and the UK government still looms large. Small and mid-sized companies normally do more of their business in the UK than larger ones. Investors are therefore cautious about them. On the other hand, they could be less affected by Brexit. They don’t rely so much on overseas trade, so the outcome of any trade deals might impact them less than bigger international companies.
Over the past 12 months small and mid-sized companies fared worse than the broader UK stock market. The FTSE 250 fell 13.3% and the FTSE Small Cap (excluding investment trusts) index fell 13.8% compared to a 9.5% fall for the FTSE All Share, which is mainly made up of larger, international firms. Of course that doesn’t mean they’ll continue to perform like this in the future as future performance isn’t guaranteed.
There are both challenges and opportunities facing small and mid-sized companies. If interest rates continue to rise, it will increase the cost of borrowing. Many of these companies rely on borrowed money to fund their growth. But lots of them carry out business in niche areas where there aren’t a lot of alternatives. Demand for their products and services could therefore be less affected by any external or economic issues.
Over the long term, small and mid-sized companies have normally done better than large ones. They’ve had greater losses as well as bigger gains along the way though. During the 2008 financial crisis, for example, they fell further than larger companies. They went on to perform better during the following years and we expect they will over the long term, but with more volatility and risk. Please remember past performance is not a guide to the future.
10-year performance of UK small and mid-sized companies vs the broader UK stock market
Past performance is not a guide to the future. Source: Lipper IM to 31/12/2018
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 fallen over the past 12 months, by almost exactly the same amount as the FTSE 250 index. These are short-term movements, whereas Spencer takes a long-term view of a company’s prospects.
Giles Hargreave and Guy Feld invest in some of the smallest companies listed on the UK stock market.
The fund has one of the strongest teams in the UK small companies sector behind it. That’s important as the managers invest in a large number of businesses. The fund’s fallen over the past 12 months, though it’s still ahead of the benchmark. The managers’ long term track record has been superb. They’ve demonstrated their skill in identifying companies that have bright futures ahead of them. Over the years they’ve invested in hundreds of companies that’ve grown although they won’t always get it right. We think their skill and experience means they’ll keep doing this for many years to come, though there are no guarantees.
The fund aims to mirror the performance of the FTSE 250 index as closely as possible. It does this by investing in the same companies and in the same proportion as the index.
This tracker fund is a convenient and low-cost way of investing in a broad range of UK mid-sized businesses. HSBC uses its scale and resources to keep costs as low as possible, which helps the performance mirror the index as closely as possible. Any costs will hold back performance though, so as with any tracker the fund will nearly always be slightly behind the index. We think this is an excellent passive option to invest in UK mid-sized companies.
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. Over the long term he’s done well and we think it has the potential to do so in future. There are other successful mid-sized companies funds offered at a lower price though. The fund has a concentrated portfolio, which is a higher-risk approach.
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 performance has been excellent, though there’s no guarantee this will continue. We think it’ll do well over the long term, but we also think it’s expensive compared to many other UK smaller companies 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.