What is next?
In terms of where the next stage of the rally could come from, Gervais Williams, a veteran UK smaller companies fund manager at Premier Miton, says the market rally in the UK and US has been driven by investors' preference for mega caps, “but it is noticeable that more recently as the US big tech stocks have fallen in value, US smaller companies have performed better, implying those are inversely correlated".
And as those companies produce profit warnings, he says investors will focus more on businesses that are profitable today, rather than businesses that will be profitable in the future.
Stuart Widdowson, who runs the Odyssean Investment Trust, which focuses on smaller companies, says the movements of the small-cap markets in recent years has largely been driven by outflows, with the assets in open-ended small cap funds dropping by about a third in three years, creating “forced sellers” in the market.
He says is also of the view that the tide may be turning in this regard, with some family office-type investors increasing their allocations.
Widdowson says institutional buyers have yet to increase their allocation to UK smaller companies and this is where he feels the next leg of growth can come from.
One area where he is finding particular value is industrials. He says many companies have had very low earnings in recent years and seen their share prices suffer accordingly, but he says earnings are starting to recover, even from a very low level, and so the market will start to push up the share prices of companies in that sector.
Widdowson added that while money has started to return to the smaller-companies sector, the market for initial public offerings has remained in the doldrums, meaning any flows will largely come into the companies already listed.
Invesco’s Brown is also keen on this part of the market. His rationale is that demand for industrial goods crashed after the pandemic, as many businesses had built up excess inventory during or immediately thereafter, particularly as a feature of economies since the pandemic has been consumers focusing on services, rather than goods.
But Brown says this is changing, with inventories having returned to more normal levels, implying that restocking, and therefore a pick up in demand for industrial goods, is imminent.
Ben Yearsley is an investment consultant at Fairview. He says he has been “structurally” overweight smaller companies as he believes those have the capacity to grow faster. He tends to have UK, global and US allocations.
Yearsley says he focuses on growth, rather than value funds, in the smaller companies space.
Georgina Brittain, who runs the JPMorgan UK Smaller Companies Growth and Income Investment Trust, says smaller company investing is typically associated with growth companies, namely businesses that would be expected to generate the bulk of their revenue in the future, rather than in the present.
