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Thinking Small For Big Returns

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Summary

Investors are finding opportunities among the UK’s small and medium-sized companies despite Brexit uncertainties.

3 min read

As complex negotiations begin in Brussels, only time will tell what sort of deal the UK will make with the EU. 

UK large cap companies – represented by the FTSE 100 – have done well in this environment, buoyed by sterling weakness that has boosted returns for these large, multi-nationals.  The FTSE 100 bounced back rapidly after the vote to leave the EU, rising 7% within the week.

The FTSE 250 fell further and was slow to catch up. Companies in this index of mid-cap and smaller companies didn't get quite the same benefit of sterling exposure, while worries about the UK economy were  a drag on these more exposed companies.  However, a year on from the EU vote the index is now up 21%, showing there are still opportunities further down the size scale.

 

Capital ideas

Market capitalisation is quite a simple idea – it represents how much a company is worth based on the value of  the shares and bonds that it has in issue. The FTSE 100 is an index that aggregates price movements in shares of the 100 most highly valued companies on the London Stock Exchange. The constituents of the index change quite regularly as companies change in value, particularly at the lower end, but many of the larger companies such as Unilever, Royal Dutch Shell and HSBC have been part of the index for decades.

The FTSE 250 represents the next 250 largest companies. While the smallest companies in the FTSE 100 are capitalised at around £4bn, the lower reaches of the FTSE 250 go down to companies capitalised at £700m.

“Around 22% of our UK exposure is in small and mid-caps.”

Finding value

One of the attractions of investing in smaller companies has long been that, compared with larger stocks, they are covered by fewer analysts and fund managers. This creates inefficiencies in the market, as share prices don't always offer a true reflection of smaller companies’ prospects and performances. Managers with detailed, specialist knowledge are able to spot mismatches and find value.

Among the small caps, there has traditionally been a broad range of businesses, many of which have shown the potential to grow quickly, not least because they are dynamic and flexible enough to adapt to new areas. When times have been good, some mid-caps have been the target for mergers and acquisitions. As we outlined in April, the small companies sector in Europe has brought investment opportunities, and there have been others in the UK. (see Small can be beautiful)

Specialist expertise is required, and Coutts gains most of its access to UK equities through the actively managed CF Lindsell Train UK Equity Fund. This fund has a focus on quality and value, and has performed well in recent months.  In 2017 to date, Lindsell Train's active approach has seen it return 14.5%, compared to 4.8% in the FTSE 350, which tracks both the FTSE 100 and 250. 

“Fund managers with specialist knowledge have spotted opportunities.”

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Around 22% of our UK exposure is in small and mid-caps, which includes the Lindsell Train fund, as well as holdings from the equity themes and stocks in our 30-stock direct investment model. In a balanced portfolio, UK exposure totals around 12.5%.  

With small and mid-caps, there has tended to be more short-term volatility than with larger companies. As ever, Coutts is focused on the long term and likes UK equities, while using an active manager should bring a degree of protection if and when the market turns.

 

Key Takeaways

There are increasing opportunities within small and mid-cap UK companies despite Brexit uncertainties. One of the best ways to access smaller companies is through specialist fund managers whose in depth knowledge of the market allows them to deliver better returns than the index. 

About Coutts investments

With unstinting focus on client objectives and capital preservation, Coutts Investments provide high-touch investment expertise that centres on diversified solutions and a service-led approach to portfolio management. Our investment process is as disciplined as it is creative – ensuring tailored solutions with robust results.

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