Small and mid-cap stocks are typical outperformers in times of recovery and economic growth as these are usually companies that have a domestic focus and therefore benefit from improvements in the macro environment.
This has certainly been the case in the UK for the 12 months to May 14, with the FTSE Small Cap ex investment trusts index delivering a return of 28.87 per cent compared with just 8.02 per cent from the FTSE All-Share.
As we start to enter the second half of the year, however, the performance of these companies is starting to lag, with year-to-date figures from FE Analytics showing the FTSE All-Share moving ahead with a return of 3.19 per cent, against the FTSE Small Cap ex investment trusts index return of 2.71 per cent.
The quarterly review from Numis Securities on the performance of the Numis Smaller Companies index suite, notes that UK smaller companies are continuing a strong performance run that they have enjoyed since 2012. But it suggests style and sector influences have been relatively limited so far this year, meaning it has been a “true stockpickers market” for small company managers.
That said, the Numis research shows that microcaps were a particular outperformer in the sector, with the FTSE Fledgling index recording a first quarter return of roughly 8 per cent.
It states: “For a number of years through until the start of 2013 there was little to choose between larger small companies and smaller small companies. However, in the last year in particular smaller small companies have performed very well.
“The most notable index performance so far in 2014 has come from the minnows. This repeats the pattern seen in 2013. Overall smaller companies, as measured by the Numis index, have modestly outperformed midcaps (FTSE 250) so far in 2014.”
Since the start of 2012 small and mid caps have dominated their larger cap peers, with the FTSE Small Cap ex investment trust index delivering a return of 101.38 per cent between January 1 2012 and May 14 2014, compared with just 35.19 per cent from the FTSE 100.
With the UK economy gaining more traction, this could open the door for large caps to start outperforming once again, but that doesn’t necessarily mean the bull run is over for the smaller end of the market.
Stuart Widdowson, fund manager at Strategy Equity Capital investment trust, notes: “After such a strong run, it is not surprising some of these companies have paused for breath, as a lot had rerated to the point where they are expecting very good things. It is very much pause for breath in the market and we think the next stage will be led by higher quality companies that just deliver.”
Nyree Stewart is features editor at Investment Adviser
MID CAPS vs SMALL CAPS
Number of constituents in the FTSE Small Cap index
Number of constituents in the FTSE 250 index
Average net market cap of FTSE 250 index constituents
Average net market cap of FTSE Small Cap index constituents