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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.

Kate Marshall - Senior Investment Analyst
3 December 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 £2.1bn - £101bn Large 101
FTSE 250 £154m - £3.7bn Medium 251
FTSE Small Cap £3m - £683m Small 263
FTSE Fledgling £1m - £107m Micro 93
FTSE AIM £0m - £2.9bn Micro to large 716

Source: www.ftse.com as at 31 October 2020.

Our view on the UK small 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 can 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 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.

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 providing it fits your needs and objectives.

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 faced one of their toughest years since the 2008 global financial crisis. So far for the year to the end of October 2020, small companies have lost 20.1%, while medium-sized companies have fallen 24.9%. For comparison, the UK's 100 largest businesses have fallen 24.0%. As always, past performance isn't a guide to future returns.

Small and mid-caps suffered the worst of their losses when news of the global coronavirus pandemic heightened in March. Smaller businesses have often been less resilient to economic shocks than larger ones and so some investors have tended to seek out the perceived relative shelter of larger, more stable companies during crises.

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. While UK share prices rebounded until June, they have since remained subdued, partly due to ongoing uncertainty about the virus, as well as Brexit. This means they’re still a way off from their pre-crisis peaks and this is a very short period of time to look at.

2020 has been a reminder why smaller companies are higher-risk, 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.

Many active funds investing in small and mid-caps have held up better than their respective broader markets. And while some have lost money, it’s been to a lesser extent than the market. This has provided an element of shelter to investors' capital and could help put these funds on the front foot when markets recover. There are no guarantees about future performance though.

Chart showing 10 year performance

Past performance is not a guide to the future. Source: Lipper IM *to 30/10/2020.

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 on the HL platform. It is a maximum of 0.45% a year - view our charges. Comments are correct as at October 2020. 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.

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 a portfolio with others that invest in UK companies either higher up or lower down the size spectrum. It invests in a fairly small number of companies, which means each one can significantly impact performance, though this increases risk.

Richard Bullas, the fund's manager invests in medium-sized 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 UK small and medium-sized companies investor. He recently took over the fund from long-serving manager Paul Spencer, who Bullas worked closely with for many years. He's got the support of a team who we rate highly, and we think the fund is in good hands under Bullas.

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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 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 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.

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. 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.

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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Giles Hargreave and Guy Feld invest in a large number of small UK companies that they think have bags of growth potential.

We think this is an excellent option for adding exposure to some of the smallest companies on the UK stock market. It could work well alongside other funds focused on the larger FTSE 100 and FTSE 250 companies.

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.

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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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 Anna Macdonald, 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 admire the team's experience, strong track record and their sensible approach, and believe they have the ability to deliver good long-term results for investors. The fund is a relatively new addition to the Wealth Shortlist and was added to the list in July 2020. 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.

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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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