Where on the market cap scale should investors be in preparation for Brexit?
The immediate aftermath of the UK’s vote to leave the European Union (EU) saw a rough and ready consensus develop among UK equity investors.
This was the notion that the fall in the value of sterling relative to other currencies would mean that companies with overseas earnings would benefit, and businesses with a focus on the UK domestic economy would, deservedly, fall from favour.
Such an approach pointed firmly to investments in the FTSE 100, where over 70 per cent of earnings come from large caps, compared with about 50 per cent in the FTSE 250.
Yet despite such data, it is the mid-cap market that has performed better over the past year, with the FTSE 250 index returning a negative 5.21 per cent, compared with a negative 5.91 per cent for the the large-cap index.
Such data has prompted Alex Wright, who runs the Fidelity Special Situations fund, to turn more of his attention to large-cap shares.
Mr Wright says a myth has developed among market participants that mid-caps have performed poorly, and this has prompted many investors to focus on that part of the market for value, when, in truth, large caps are where the underperformance has happened, and, in his view, this is where the value lies.
Simon Gergel, who manages the £693m Merchants Investment Trust at Allianz Global Investors, points out: “There are opportunities across the market cap spectrum. We have exposure to large mining, oil and pharmaceutical companies, as well as to small media and services businesses.”
Andrew Walker, portfolio manager at Walker Crips, explains the UK's looming exit from the EU has not changed how he manages the portfolios he runs for clients.
He says he has always used a multi-cap investment approach as this provides maximum flexibility, and he is persisting with this because he does not know what will happen to the UK market after Brexit. So a multi-cap approach means he is minimising risk by having a diversified portfolio.
Graham Bishop, investment manager at Heartwood Investment Management, says if there is a 'no deal' Brexit, then it is likely the value of sterling would fall sharply relative to other currencies, and, because of the overseas earnings of the larger companies, he would expect the small and mid-sized companies to perform poorly relative to larger businesses.
But Judith Mackenzie, who runs a range of small-cap funds at Downing, believes the advantage very small companies have - those she defines as having a market cap of less than £150m - is that those businesses tend to operate in niches which mean they don’t need strong economic growth to prosper.