Small and medium-sized companies can punch above their weight. They 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 can offer higher potential for growth than large companies.
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. The larger ones are found in the FTSE 250 index. These are the next biggest 250 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.
Smaller and medium sized companies can grow faster than larger businesses over the long term. There's no guarantee of that though, and their share prices can also be more volatile so there will be more ups and downs in performance along the way.
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 have gone down, it's usually the smaller companies that have suffered 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 a lower price than they would like, or experience restricted trading. That's because there are fewer buyers and sellers of smaller companies' shares.
Small and medium-sized companies are often under-researched which creates lots of opportunities to uncover hidden gems. We think this is an area where active managers can demonstrate their stock-picking edge.
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 providing it fits your needs and objectives.
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 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 on the HL platform. It is a maximum of 0.45% a year - view our charges. These fund ideas are reviewed and updated periodically to ensure they match our latest views. Remember investing in smaller companies is higher risk than investing in larger companies.
Wealth Shortlist fund reviews
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.
This fund is focused on delivering long-term growth by investing in companies from the FTSE 250 index of medium-sized businesses. It could work well in the UK part of a portfolio alongside funds that invest in UK companies either bigger or smaller in size.
Richard Bullas, the fund's manager, invests in companies that are 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. Bullas is an experienced investor and has the support of a team that we rate highly.
The fund aims to track the performance of the FTSE 250 including investment trusts index as closely as possible.
The fund is a simple, low-cost way to invest in medium-sized UK companies. It could be a useful option for portfolios seeking broad exposure to more domestic UK businesses, or could work well alongside a FTSE 100 tracker to provide more diversification and growth potential.
The fund invests in all constituents of the FTSE 250 index, and in the same proportion. This includes the investment trusts of the index, many of which invest overseas, which gives the fund a bit more international exposure than an ex-investment trusts equivalent.
The team at HSBC has 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.
As a passive fund, this is a simple and low-cost option for exposure to UK medium-sized companies. It could be useful for portfolios wanting exposure to smaller, more domestically-focused UK businesses with more room for growth than those from the FTSE 100. Many of the investment trusts in the wider index invest outside the UK, so the fund offers purer exposure to medium-sized UK businesses.
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. We think the team behind it will do an equally good job over the long term, although there are no guarantees.
Royal London UK Smaller Companies aims for long-term growth by investing in some of the smallest companies in the UK stock market.
Growth is the overarching style of the fund, which means the managers focus on companies with long-term earnings growth potential. They also consider valuation meaning a company's share price should be lower than its future earnings suggest it should be. This investment approach is 'GAAP' - growth at an attractive price. We think lead manager Henry Lowson is a passionate and experienced smaller companies investor with the potential to deliver attractive returns over the long term, although there’s no guarantees.
This fund aims to deliver long-term growth by investing in smaller companies that have more room to grow than larger ones.
Paul Jourdan, David Stevenson and Scott McKenzie, the fund's managers, are more conservative in their approach than many others in the sector. They look for high-quality, financially-strong and growing businesses that, because of their size, are overlooked by many other investors. These can be from tiny 'micro-cap' companies all the way up to those on the cusp of becoming large ones.
We think the team's experience, track record and sensible approach means they have the ability to deliver good long-term results for investors. We think the fund could be a useful option for adding growth potential to an adventurous portfolio mainly invested in larger companies. As always, past performance isn't a guide to the future.
Latest news on this sector
Joseph Hill | 25 July 2023
We look at what’s happened in the UK economy, how the stock market's been coping, and how our Wealth Shortlist funds have fared. Read article.
25 July 2023 | 7 min read
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.