The FTSE 250 index has outperformed both the FTSE 100 and small cap indices, year to date, posting r...
The FTSE 250 index has outperformed both the FTSE 100 and small cap indices, year to date, posting returns of 11.83% to 28 August.
Simon Atherton, fund manager at Aberdeen Asset Management, says mid and small cap stocks have performed well since autumn 1998.
Following fears of a worldwide recession during the peak of the Asian and Russian crisis and the collapse of hedge fund LTCM, there was a 'flight to safety' during which time high quality bonds and blue chip equities were supported, he says.
Global crisis was averted due to the Fed's quick reaction in lowering interest rates, which caused a high bounce back in small and mid cap stocks, Atherton adds.
He says this has also caused the gap in P/E ratios between the FTSE 100 and 250 to narrow, with the FTSE 100 now trading on 27 times earnings, while the mid cap index is trading at 22 times.
Mark Hall, UK fund manager at BWD Rensburg, says between January and March there was a lot of talk the new economy had finally arrived.
At this time many companies were elevated up from the 250 into the FTSE 100. Consequently when the technology correction happened in mid-March and the value of these companies went down, it affected the FTSE 100 index and not the 250, Hall says.
Sam Greenhough, fund manager at BWD Rensburg, says the outperformance of the 250 has had little to do with the focus of the index on new economy or old economy stocks. He believes it is because there is a diverse spread of companies in the 250 whereas the 100 relies on a handful of companies and, in particular, telecom stocks, which have been performing badly as of late.
In the FTSE 100 telecoms make up around 17% of the index, compared to around 2% in the 250. Guy Cameron, fund manager at Baillie Gifford, says: "In hindsight, the market was over excited and there was something of a bubble which burst."
Hall notes leadership in the market has switched back to old economy stocks.
The FTSE 100 is currently trapped in a tight trading range, he says. If it were thought that interest rates have peaked on both sides of the Atlantic, FTSE 100 stocks would power ahead, rather than those of the 250, Hall says, adding in the past week the FTSE has made some sharp move upwards, while mid caps have lagged.
Mid cap stocks are not particularly cheap, fund managers agree, but the 250 does have a number of attractive companies. Cameron mentions Computer Center, and Diagonal, an IT consultancy. Atherton says: "If we can identify fast growing companies we can lock into significant outperformance by investing in this area of the market."
Aberdeen Asset Management has holdings in HIT Entertainment, a children's animation and intellectual property company. Capital Radio and leisure company Fitness First are also mentioned as favourites within the 250 index. Atherton adds: "These are not necessarily household names but they are different from the norm. There are more unique companies in the mid cap rather than the FTSE 100."
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