Talking Point  

Small caps can’t fill the income void in 2020

Small caps can’t fill the income void in 2020
 photo: pexels

Smaller company shares are not a viable alternative source of income in the current climate, according to David Clark, fund manager at Saracen.

Mr Clark jointly manages both a UK Alpha fund, which is comprised mostly of mid and small caps, and also a UK Equity Income fund. 

He said: “If people are interested in the Alpha fund, but ask about income, then I tell them to look at the income fund. Small and mid cap companies need the capital they generate in order to fund their future growth.”

Mr Clark added that while the dividend prospects for some of the largest companies in the UK market, such as Shell and BP, are in doubt, “the small companies that pay dividends have not been immune to conditions in the wider market, they are also trying to preserve what capital they have right now, at a time of economic uncertainty.”

Richard Champion, deputy chief investment officer at Canaccord Genuity Wealth Management, believes the structural changes happening in the economy, and accelerated by Covid, will benefit mid and small caps over the long-term, at the expense of larger companies.

He said: “The Coronavirus crisis has tested the mettle of companies large and small.

But what has become apparent, is that large parts of the FTSE 100 have become a market equivalent of Jurassic Park, housing the dinosaurs of former glory. And Covid-19 is the asteroid that has sent many of them hurtling, if not into oblivion, then the FTSE 250. 

"Comparatively, companies outside the FTSE 100 look more like the tiny mammals, poised to inherit the earth.

"There is no doubt that as a universe, small and mid-cap stocks are more interesting.

"The smaller the company, the more likely it is to go bust. The primary upside benefit of small cap investing is the growth potential – small companies can potentially grow at a faster rate and by a greater ratio than mid or large cap counterparts.”

david.thorpe@ft.com