It is easy to overlook UK smaller companies in times of market stress but the sector's long-term potential is strong. Rayner Spencer Mills' Ken Rayner suggests three funds to access it.
The IMA defines the UK Smaller Companies sector as comprising funds that invest at least 80% of their assets in UK equities of companies which form the bottom 10% by market capitalisation.
While UK smaller companies is considered a more specialised space, it can be a useful option for larger UK portfolios. Some of the largest returns can be sourced from this area of the market but this brings with it higher levels of volatility.
Many smaller companies have significant international sales, so the sector is no longer just a play on the UK economy. The wider universe allows good stock pickers ample scope to find sectors and companies that are performing strongly.
Core and satellite: The UK smaller companies funds on our radar
In addition, many of the UK’s smaller companies have less gearing than their mid- and large-cap peers and are, therefore, more able to self-finance growth.
First quarter expansion, confirmed last week by the Office for National Statistics, saw UK growth of 0.3%.
However, the International Monetary Fund (IMF) has downgraded the overall 2013 growth forecast from 1% to 0.7%, which suggests a muted growth environment for at least two years.
In terms of market movement, the FTSE All Share rose by 14.2% from the start of the year to the end of May, with the continued search for yield resulting in poor performance in low yield areas.
The rise of equity markets up until the most recent blip has tended to be driven by large-cap defensive stocks rather than the mid- and small-cap end of the market. At the beginning of the rally in 2012, investors initially felt confident to invest in the smaller-cap end of the market, with valuations so extreme.
But by Q1 2013, markets had risen a long way and many investors started to back safer areas of the equity market in order to participate in growth while protecting against potential falls. However, the potential for mid- and small-cap remains strong over the longer term.
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