Little goes a long way
FIVE-MINUTE GUIDE TO... INVESTING IN UK SMALL COMPANIES
INVESTORS have been rushing into smaller companies funds after Boris Johnson’s election victory in December boosted confidence and encouraged people to take on more risk in the hope of generating higher returns.
Smaller company stocks are more volatile than major blue-chips, but in the long run, they may offer stronger growth prospects.
Buying individual stocks in this sector is too big a gamble for most, but you can spread your risk by investing in a range of firms via a smaller companies fund.
The smaller companies sector tends to outperform when the economy is growing but investors are quicker to sell in a crash, and this greater volatility means they are not for everyone.
THINK SMALL
Investors flocked to UK smaller companies over the last month, with online platform Interactive Investor reporting a surge in sales.
Head of markets Richard Hunter said the sector is riding a wave of renewed confidence after being shunned by investors due to Brexit uncertainty: “The recent election could unlock a flood of pent-up investment from overseas, including perhaps M&A activity.”
Separate figures from investment platform AJ Bell show smaller companies beat every other fund type in the month after the election, led by JP Morgan Smaller Companies, up 15.74 per cent.
VT Teviot UK Smaller Companies grew 11.34 per cent, while UK smaller companies funds from Schroders, Investec, Threadneedle, Liontrust, Henderson and Aberdeen also packed a punch.
AJ Bell personal finance analyst Laura Suter said the so-called “Boris bounce” sent investors rushing back into UK companies, which had previously fallen out of favour: “They dominated the performance tables as investors bid up UK stocks.” Sam Lees, head of research at Fundexpert.co.uk, said smaller company valuations are still relatively low, bringing further opportunities for buyers.
He warned that the decade-long global bull market run must end at some point: “When that happens, we would expect small caps to fall further than large caps.”
His fund tips include JP Morgan UK Smaller Companies, M&G Smaller Companies, Blackrock UK Smaller Companies and Montanaro UK Smaller Companies Trust.
Darius Mcdermott, managing director of Chelsea Financial Services, said smaller companies offer superior growth prospects: “It is easier to double in size if your market capitalisation is just £10 million, rather than £10 billion.”
The risk is that smaller firms stay small or go bust, while their shares are less “liquid”, making them harder to sell in a crash as fewer people want to buy them: “You need a high tolerance to risk and a long-term horizon.”
Mcdermott rates Liontrust UK Micro Cap, a relatively new fund that targets the UK’S very smallest companies, and is up 65 per cent in just three years.
He also tips T. Rowe Price European Smaller Companies, which invests in high quality small and mid caps in the UK and Europe.
Further afield, Baillie Gifford Japanese Smaller Companies is up a thumping 145 per cent over five years and Hermes US SMID Equity is up 91 per cent over five years.
Just remember that past performance is no guide to the future, especially in a more volatile sector like this one.