Your IndustryFeb 9 2015

Investing in Small and Mid-Caps - February 2015

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Approx.50min

    Investing in Small and Mid-Caps - February 2015

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      CPD
      Approx.50min
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      Introduction

      By Nyree Stewart
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      With the UK economy starting to move ahead of its European counterparts, it is perhaps unsurprising that in 2014 the FTSE Aim and FTSE Small Cap ex investment trust indices struggled with losses of 16.53 per cent and 2.68 per cent respectively, according to FE Analytics. Meanwhile, the FTSE 100 index delivered a slightly better 0.74 per cent.

      However, an index that beat even the large-cap index in the 12 months to December 31 2014 was the FTSE Fledgling index with a return of 8.84 per cent. It comprises companies listed on the main London Stock Exchange that are too small to be included in the FTSE All-Share index.

      This suggests that while the macro environment might have some effect on the performance of small and mid caps, it is not necessarily the case that they only perform in certain markets.

      James Henderson, manager of the Henderson Opportunities investment trust, points out: “There is a lot of excitement among some of the smaller companies in the UK. Some of these companies have nothing to do with the global economy and can control their own destinies because their products are so unique.”

      Richard Penny, manager of the Legal & General UK Alpha Trust, notes that smaller companies have had a good run from mid-2012. But in April 2014 there was an abrupt correction as changes in asset allocation and higher valuations saw investors move away from the sector.

      But he adds: “If we’re looking selectively for bargains, you are more likely to find them at the smaller end of the market than at the large. There is a possibility of pricing anomalies and growth companies that are below the radar, particularly when there has been a bit of a sell-off.”

      Georgina Brittain, manager of the JPMorgan Smaller Companies investment trust, points out the UK economic backdrop, particularly its low level of inflation, are positive for the UK consumer and therefore smaller companies as they tend to have more domestic exposure.

      “The earnings outlook for smaller UK companies looks positive and investors should feel comfortable with valuation levels in the smaller companies arena. There is also clear evidence that M&A activity has moved up the agenda of larger cash-rich companies, which adds extra support to the positive outlook for smaller companies.”

      Gervais Williams, managing director of Miton Group, notes that while there has been volatility at the smaller end of the market in the past 12 months, the medium-term outlook is more positive.

      “Many of the largest indices have a big weighting in mining, oil, gas and minerals, so smaller indices might have more opportunities than you think. In addition, world growth has stalled in recent years and that’s a bit of a challenge for bigger companies. Smaller companies have more growth potential and I think that will become more important going forward.”

      Whether increasing exposure to the smaller end of the market-cap spectrum is the right thing to do depends entirely on the client and their objectives. The key is simply not to overlook anything because of habit or past experience. In such an interesting and unprecedented market environment, some of the best opportunities could be where you least expect them.

      Nyree Stewart is features editor at Investment Adviser

      Small digits

      £8.3bn

      Amount of dividends paid by FTSE 250 companies in 2014

      8.84%

      Return of FTSE Fledgling index in 2014

      1995

      Launch of the Alternative Investment Market

      1997

      Launch of the FTSE Aim All-Share index

      In this guide

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