Investments  

Big gains can be made on Small Companies sector

Big gains can be made on Small Companies sector

Investors could benefit from investing in small cap-focused investment trusts, with analysts predicting that the asset class has shown some improvements.

Data from the Association of Investment Companies has shown that the average discount on the UK smaller companies investment trust sector has narrowed since the summer, from 10 per cent at the end of July to 9 per cent at 12 October. According to the AIC, this adjustment suggests growing confidence in prospects for the sector.

An analyst note from JP Morgan Cazenove stated: “Small-caps offer higher actual and forecast earnings per share growth than large caps at a time when growth is scarce, while they have strong balance sheets with markedly lower levels of net debt than large caps.

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“Despite a period of strong returns, valuations remain reasonable with average small/mid cap price/earnings ratios close to historical averages.”

The note concluded: “This is particularly true in the FTSE Small Cap index, which has some way to go in performance terms to match the recent run of the FTSE 250.”

We expect the increase in M&A [mergers and acquisitions] activity seen in 2014 to continue, and small caps will be the biggest beneficiaries in the UK market.”

Fund managers are also upbeat. Stuart Widdowson, manager of the Strategic Equity Capital trust said: “Value can be found if you are willing to look for it, particularly if you can engage with the company’s management to help unlock it.

“We also see some interesting opportunities in momentum plays ‘gone awry’ that have been overly downgraded, but whose base case remains attractive.

Harry Nimmo, manager of Standard Life UK Smaller Companies trust, said: “Smaller companies’ greater exposure to the comparative safe haven of the UK economy in an uncertain world feels right. Their greater prospects for profits and dividend growth suggests that the long-term outlook for smaller companies remains robust.”

Share price total return on £100 lump sum (to 30 September 2015)

Duration (years)

 

1 year

3 years

5 years

10 years

Overall weighted average investment company ex VCTs

 

102.22

133.15

148.70

203.91

Weighted average

UK Smaller Companies

113.53

178.45

231.05

291.59

Aberforth Smaller Companies

UK Smaller Companies

102.44

178.16

222.56

240.71

Athelney Trust

UK Smaller Companies

92.06

202.82

216.44

248.84

BlackRock Smaller Companies

UK Smaller Companies

114.46

179.39

236.73

395

BlackRock Throgmorton Trust

UK Smaller Companies

120.2

183

234.05

271.32

Chelverton Growth Trust

UK Smaller Companies

103.49

171.15

240.54

130.88

Dunedin Smaller Companies

UK Smaller Companies

110.55

136.23

185.54

266.71

Henderson Smaller Companies

UK Smaller Companies

122.34

194.32

256.26

382.56

Invesco Perpetual UK Smaller Companies Investment Trust plc

UK Smaller Companies

125.77

192.79

253.84

350.11

JPMorgan Smaller Companies

UK Smaller Companies

121.18

185.3

232.48

290.96

Montanaro UK Smaller Companies

UK Smaller Companies

114.68

142.9

181.78

288.43

Standard Life UK Smaller Companies

UK Smaller Companies

118.54

147.96

197.97

484.1

Strategic Equity Capital

UK Smaller Companies

140.91

262.83

392.84

225.31

SVM UK Emerging Fund

UK Smaller Companies

118.63

151.25

123.47

175.36

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Source: AIC

Adviser view

However, Martin Dodd, adviser at Wolverhampton-based IFA Midlands Investment Agency, was less optimistic: “Historically, of course real growth in the UK market has come from small to medium-sized companies.

“If you look at the blue chip area, it hardly moves, in comparison. Things have gone well, but there are signs of problems in the world market, and if we have a recession next year things could turn down badly. I can see signs locally as dealmakers in the Midlands are starting to put their hands in their pockets. The deals are not around in the same way they were six months ago.”