The FTSE 100 index represents close to 82% of the entire UK stock market, with the top 15 companies ...
The FTSE 100 index represents close to 82% of the entire UK stock market, with the top 15 companies accounting for nearly 55%. These mega large-cap stocks are typically covered by upwards of 20 or more research analysts ' the share price generally reflects all the publicly available information and provides little opportunity for investors to outperform.
Small cap companies are mainly under researched and as a result often undervalued. On a P/E basis, they represent better value than larger-cap stocks.
The market cap split of some UK funds seems to provide the answer. For example, ABN Amro's Equity Income fund, managed by George Luckraft, has more than 40% invested in small cap stocks, according to ABN Amro, while Jeremy Lang's Liontrust First Income fund has about 30%, according to Liontrust. Neil Pegrum's M&G British Opportunities fund holds nearly 40% in this area, according to M&G.
In the context of smaller companies representing just 3% of the UK market by size, the amount invested by these managers suggests they consider that this stock market provides good scope for future growth.
Since the beginning of 1999, the Hoare Govett Smaller Companies Index has outperformed the FTSE 100 by some 40%, according to Standard & Poor's. Having seen UK Smaller Companies enjoy such a level of superior performance, you may be wondering whether it is too late to get a look in. We do not think so and have increased our weighting here within our mainstream fund of funds.
We believe in using a combination of funds that have different styles. Three examples are Aberforth's, best described as a value fund, Edinburgh fund, which has a growth emphasis, and Standard Life's fund, which is more pragmatic in style.
This combination approach increases diversification and reduces the risk of underperformance. For example, during the tech bubble in 1999 and the first quarter of 2000, Edinburgh's fund geared towards these growth areas achieved a remarkable return of 246.3% and was ranked five out of 68, Standard Life's approach delivered 83.6% (38/68) and Aberforth's value fund returned 43.4% ranking 63 out of 68. However, Edinburgh's focus on growth stocks has seen the fund lose 61.2% since the end of the first quarter 2000, while Aberforth's fund gained 32.9%, according to Standard & Poor's.
All three funds have shown healthy gains over the period from 1 January 1999 to 18 February 2002. Aberforth gained 91.6% and is ranked 4/68; Edinburgh made 34.2% (34/68) and Standard Life's fund achieved 55.2% (16/68), according to Standard & Poor's.
Smaller companies are generally more vulnerable following market shocks with share prices often slashed as a result of illiquidity. This was certainly the case after 11 September with the Hoare Govett index recording its second worst decline since records began in 1955.
However, low interest rates have historically been helpful for smaller companies and we believe that the sector is likely to respond positively to signs of a domestic economic recovery, making the sector a stockpicker's dream not a conundrum.
Smaller cos better value than large cap stocks.
Low interest rates positive for sector.
A stronger domestic economy helpful.
30% flat rate of tax relief proposed
Letter to CEOs
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