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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
13 April 2021

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 £1.7bn - £94.8bn Large 101
FTSE 250 £302m - £5.1bn Medium 250
FTSE Small Cap £32m - £813m Small 255
FTSE Fledgling £1m - £171m Micro 89
FTSE AIM £0m - £3.8bn Micro to large 721

Source: www.ftse.com as at 26 February 2021.

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

It’s been a wild ride for investors in the UK stock market over the past year. A pandemic induced lockdown saw economic growth dwindle in 2020 as GDP fell 9.9%, the largest annual decline on record. But there have been signs of recovery with a Brexit deal now in place and a successful Covid-19 vaccination rollout.

March 2020 saw the darkest days for the stock market as uncertainty spread around the world. Small and medium-sized companies were initially the worst affected. They tend to be more sensitive to periods of market stress than their larger, more international peers.

Small and medium-sized companies recovered some lost ground over the past 12 months (to end of March) with the FTSE Small Cap growing 62.9% and the FTSE 250 rising 45.1%. By comparison, the FTSE 100 rose 21.9%. In isolation these performance figures look impressive but it’s important to remember that the past 12 months doesn’t include the initial shock of the pandemic. If we look back to the start of 2020, the FTSE 250 has only grown *0.6%, while the FTSE Small Cap rose 17.4%. Smaller businesses are known for their volatility and, as always, past performance isn't a guide to future returns.

Chart showing 5 year performance

Past performance is not a guide to the future. Source: Lipper IM *to 31/03/2021.

With everyone staying at home, the online economy has been a major beneficiary. Gaming and digital marketing companies, for example, have seen increased demand, making technology one of the best performing sectors. Covid-19 has also seen healthcare stocks perform well with companies getting involved with treatments, vaccine discovery and data. Basic materials were another notable performer. Sectors like utilities and real estate didn’t do so well.

As ever, we think a diversified portfolio should invest across companies of all sizes, operating in many different industries. 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.

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 March 2021. 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.

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. 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. 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. The team may also use derivatives to help with portfolio management, but it adds risk to the fund.

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Guy Feld and Eustace Santa Barbara 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.

We think the fund has one of the strongest teams in the UK smaller 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 performers having a big impact on the fund.

After several decades in the investment industry, Giles Hargreave recently stepped back from day-to-day management of this fund. Whilst no longer at the helm, Hargreave is still involved with the fund, taking up sector analysis responsibilities and offering guidance and knowledge to the next generation of managers.

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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. 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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