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In the sweet spot: UK mid-caps

Is there a sweet spot between the headline hogging large companies and the exciting but higher-risk smaller businesses? Jonathon Curtis makes the case for investing in mid-sized companies.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Large companies dominate both stock markets and headlines, and make up the bulk of many investors’ portfolios. Small companies offer excitement and a bit of spice for higher-risk portfolios. But what about the businesses in between?

Medium-sized companies, or mid-caps, are sometimes known as investing’s ‘sweet spot’ – they’ve got more room for growth than bigger businesses and are generally less risky than smaller ones. The FTSE 250 index is where you’ll find many of these mid-cap companies.

They do more of their business in the UK than the big firms of the FTSE 100 index, but still make around half their sales abroad. That provides lots of international diversification. With a large number of constituents, FTSE 250 companies come from a wide range of sectors. Many of them are industry-leading, innovative and financially strong businesses. What’s not to love?

Recently though they’ve been overlooked by investors. That’s been largely down to one thing: Brexit.

Brexit and UK mid-caps

Since the 2016 EU referendum many investors have shunned the UK. As mid-cap companies are more exposed to the UK economy than larger ones, they’ve been more strongly affected. While on the whole their share prices have still gone up, they’ve lagged both their larger UK counterparts and their mid-cap cousins overseas.

With Brexit uncertainty potentially ending soon, many mid-cap companies could be big beneficiaries. If investor worries about the UK lift, their stifled share prices could spring back into action. Recently we’ve seen hints of what could happen. Positive news about UK-EU negotiations has sent the FTSE 250 index temporarily surging. Nothing is guaranteed but many are set to breathe a sigh of relief once a line is drawn under Brexit.

FTSE 250: Hard to beat

Over the long-term UK mid-cap companies have often delivered better returns than both larger and smaller ones. In the last 10 years* the FTSE 250 index has risen 186.6%, while the FTSE 100 grew 110.9% and the FTSE Small Cap index rose 150.1%. Remember past performance isn’t a guide to future returns.

UK index performance over 10 years

Past performance is not a guide to the future. Source: Lipper IM *to 30/09/2019

It’s not just other indices that struggle to keep up. Over the past decade* only 11% of funds in the IA UK All Companies sector with at least a 10-year record returned more than the FTSE 250 index. It’s important to note many of the funds in this sector don’t invest in mid-cap companies, but it shows how few UK funds have done a better job than simply tracking the mid-cap index.

Please remember that all investments fall and rise in value, so you could get back less than you invest. This article is not personal advice. If you’re unsure if an investment is right for you, seek advice.

HSBC FTSE 250 Index fund

This ‘tracker’ fund aims to copy the performance of the FTSE 250. It does this by investing in all the companies that make up the index, and in the same proportions. The fund uses HSBC’s scale to keep costs low so it can track the index closely, as higher costs hold back returns. We’ve negotiated a lower ongoing fund charge for HL clients, so it’s available for 0.08% plus HL’s platform charge of up to 0.45%. We think the fund is a simple and convenient way to invest in a broad range of UK medium-sized businesses.

Annual percentage growth
Sep 14 -
Sep 15
Sep 15 -
Sep 16
Sep 16 -
Sep 17
Sep 17 -
Sep 18
Sep 18 -
Sep 19
HSBC FTSE 250 Index fund n/a 9.1% 14.8% 5.0% 0.9%
FTSE 250 11.4% 10.2% 14.3% 4.9% 1.2%

Past performance is not a guide to the future. Source: Lipper IM to 30/09/2019

Where n/a is shown no data is available for this unit class.

More about this fund, including charges

HSBC FTSE 250 Index Key Investor Information Document

Franklin UK Mid Cap

If you’d prefer an actively managed mid-cap fund, we think Franklin UK Mid Cap is an excellent option. Manager Paul Spencer invests in FTSE 250 companies he thinks are well-run and have strong growth potential. He invests in a small number of companies so each one could have a big impact on performance, but it’s a higher-risk approach. Spencer’s delivered excellent long-term performance since he took over in February 2006. He’s grown the fund 352.2%*, compared with the FTSE 250’s 213.9% gain. That’s not an indication of future returns.

Annual percentage growth
Sep 14 -
Sep 15
Sep 15 -
Sep 16
Sep 16 -
Sep 17
Sep 17 -
Sep 18
Sep 18 -
Sep 19
Franklin UK Mid Cap 15.6% 2.0% 20.5% 7.6% 7.8%
FTSE 250 11.4% 10.2% 14.3% 4.9% 1.2%

Past performance is not a guide to the future. Source: Lipper IM* to 30/09/2019

More about this fund including charges

Franklin UK Mid Cap Key Investor Information Document

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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