More than 18 months on from the Brexit vote, the ultimate consequences of the UK’s impending departure from the EU remain far from clear. Predictions about the potential ramifications still vary wildly, from hopes for improved trade with the rest of the world, to fears that labour and capital will leave the country.
Much of this may only come to light in a matter of years, rather than months. But in one respect, the UK has already suffered an exodus of sorts.
Retail investors pulled more than £2.5bn from UK equity funds in 2017. The Investment Association’s (IA) UK All Companies cohort – its most popular fund grouping by assets – lost more than £1.6bn, and the UK Equity Income sector suffered outflows exceeding £1bn.
This came at a time when domestic markets were on the up, and funds in general were registering record sales. However, one family of UK equity portfolios still provides cause for optimism.
IA UK Smaller Companies funds took in £158m on a net basis in 2017, with sales in positive territory for 10 of the 12 months.
Several factors can explain this. The UK Smaller Companies sector holds a more concentrated level of assets than the other two groups, with the category’s £15.6bn of assets representing less than a 10th of the amount in the UK All Companies cohort – meaning that the former could be less vulnerable to big outflows at moments of uncertainty.
Some investors who stick with smaller companies products may be making a broad market capitalisation call, or perhaps backing domestic-focused stocks to confound the doubters. Others will simply favour small-cap funds for their performance, which proved particularly strong in 2017.
A good vintage
The FTSE UK Small Cap index rose 21.1 per cent last year, data from FE Analytics shows. Even in a strong period for markets this stands out, dwarfing the 13.1 per cent gain in the FTSE All-Share and the 12 per cent rise in the FTSE 100.
Funds capitalised on this momentum well. The average IA UK Smaller Companies vehicle posted a 27.2 per cent gain for the year, with a typical trust from the Association of Investment Companies (AIC) peer group returning 27.6 per cent.
Small-cap vehicles stood out against the broader funds universe, too. Research by BMO Global Asset Management identified IA UK Smaller Companies as the second most consistent sector for top-quartile returns on a rolling three-year basis as of the end of 2017. Clearly, performance is even stronger still for those who picked the top funds in this space.
