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.
Scroll across to see the full table.
|Index||Approximate market cap||Size||Number of companies|
|FTSE 100||£1.6bn - £131.7bn||Large||101|
|FTSE 250||£174m - £6.5bn||Medium||250|
|FTSE Small Cap||£30m - £952m||Small||252|
|FTSE Fledgling||£2m - £153m||Micro||86|
|FTSE AIM||£0m - £2.6bn||Micro to large||725|
Source: FTSE Russell as at 30/08/21.
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.
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.
It's been an action-packed 12 months for the UK stock market. Covid-19 has continued to preoccupy the minds of investors and policymakers alike. So far, the vaccine rollout has been largely effective with over 65% of the population being double vaccinated, ahead of the European Union and G7 average. However, we're not out of the woods yet and we must remain vigilant.
Over the past 12 months to the end of September 2021, the FTSE Small Cap returned 51.7%* while the FTSE 250 grew by 35.7%. In contrast, the FTSE 100 returned 25.4%.
It's important to remember these markets are starting from a lower base following the pandemic induced sell-off in March 2020. Smaller companies were some of the worst affected and saw one of the sharpest contractions on record in just a number of days. Since the start of 2020, the FTSE Small Cap has increased by 30.9% versus 9.0% for the FTSE 250. Lost ground has been recovered but only just for the FTSE 100 returning 0.02%.
Active managers have had the edge in this environment too. Since the start of 2020 the IA UK Smaller Companies sector average returned 2.7% more than the index. Smaller businesses are known for their volatility and, as always, past performance isn't a guide to future returns.
Chart showing 5 year performance
Scroll across to see the full chart.
Past performance is not a guide to the future. Source: *Lipper IM to 30/09/2021.
What to expect next
Stimulus from policymakers has played a large part in the UK's stock market and economic recovery. Policies like ultra-low interest rates and a stamp duty holiday have encouraged increased spending and consumption. This activity has caused an increase in inflation. The UK Consumer Price Index (CPI) – a common barometer for inflation – rose 3.2% in the year to August 2021. The Bank of England continues to believe this is only a temporary phenomenon, but interest rate increases are expected in 2022, a move that would help ‘cool down' the economy.
Interest rates are used by some investors to calculate the value of shares, and higher interest rates usually mean lower valuations. Higher input costs will likely lead to higher prices too and companies without the ability to pass these price increases on to the consumer – those without pricing power – may struggle.
On a more positive note, the UK continues to look reasonably valued. This has been reflected through heightened M&A (merger and acquisition) activity as international investors and private equity firms look for bargains in the UK market.
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.
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 September 2021. 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 a portfolio with others that invest in UK companies either bigger or smaller in size.
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 took over management of the fund last year from long-serving manager Paul Spencer, who Bullas worked closely with for many years. He's got the support of a team that we rate highly, and we think the fund is in good hands under Bullas.
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. 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.
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.
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.