When is the right time for small caps?

This article is part of
AIM and Small Caps - December 2013

On AIM stocks, which make up roughly 80 per cent of his Smaller Companies fund and more than a third each of his Multi Cap Income fund and Diverse Income Trust, Mr Williams says their stronger returns come with challenges. “People always love to hate AIM stocks because they see them as speculative and therefore are pretty much expected to disappoint.”

Mr Hargreave puts the current popularity of AIM down to more recent tax breaks around Isa investing and IHT allowances. He says their poor reputation is often unjustified and believes many of them are underestimated. The veteran manager does however stress the point across AIM, and small caps in general, that their breath of focus is such that generalisation is almost impossible.

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Rob Harley, senior research analyst at Bestinvest, says while small caps do – given reasons aforementioned – rally during risk-on periods, he says that much of the performance is relative given the qualities of the larger-cap indices.

“You had the eurozone crisis of 2011, [Mario] Draghi’s comments in 2012, where small caps saw a massive rally. But, at the same time, some of the big sectors struggled. Miners struggled in the face of a China slowdown, the oil and gas sector saw earnings downgrades – so the smaller-cap index saw relative outperformance because they didn’t suffer the same drag.”

That said, Mr Harley agrees with Mr Nimmo that higher earnings growth has led to a rerating of the sector – with industrials and consumer services making up over half of the Numis Smaller Companies index. Small caps are now trading at a premium, he says, and anyone looking at the space now, might have arrived too late.

Sam Shaw is a freelance journalist


James Calder, research director, City Asset Management

We took a positive view on UK small caps earlier this year, focusing upon Gervais Williams’ CF Miton UK Smaller Companies fund. Smaller company funds will benefit from the recovery of the UK as they tend to be more domestically orientated than large cap. While the asset class should be considered higher risk than large cap, we believe the improving economic outlook and the return potential will reward investors for taking the additional risk.

Ian Cooper, fund analyst, Brewin Dolphin

The significant levels of small-cap outperformance investing has re-accelerated still further since 2012. This is a rational response to improvements in the economic cycle, to which smaller companies have a higher sensitivity than their larger counterparts. The business cycle can, therefore, be a useful tailwind for small-cap investors. However, the fundamentals of UK small caps is also currently supportive, with many companies well capitalised, exhibiting decent top-line growth – sourced increasingly from overseas – and well-placed to benefit from M&A.