Should investors be bothered with small company shares and funds? A surprising question to ask you m...
Should investors be bothered with small company shares and funds? A surprising question to ask you might think.
But the viability of investing in smaller companies is anything but a moot point to large US investment banks. A growing number of big investors are giving up on small companies completely, according to a recent survey by the large US investment bank Piper Jaffray.
Piper Jaffray concluded that big institutions want big companies with large numbers of shares that they can deal in easily and quickly.
Small caps, under £175m in value, no longer fit this bill and with the amount of research into small companies dropping, so is institutional interest.
To back up its comments, the bank identified 56 UK companies valued between £25m and £175m that have grown operating profits by over 10% compound annually for the last ten years, yet are rated on a discount to companies on the FTSE 100.
These are well run and growing companies says Piper, though it did not name them. Their only problem is that they are too small to figure on the radar on the large institutional investors that now dominate the UK stock market.
If the best small companies can't get a look in, what chance does an average company worth less than £200m have of getting a fair market rating for its shares.
Piper's conclusion is that the only way that companies can change this state of affairs is by either selling out to a larger rival or else go private. It is an opinion that ex-Perpetual smaller companies fund manager John Sweet, now launching a fund for Tether & Greenwood, responded to in Investment Week last week. Sweet maintains that there are more than enough examples of smaller companies achieving share price success to discredit Piper's views.
Just because Merrill Lynch is no longer inclined to deal in companies worth less than £1bn, ignoring small companies would be a mistake for smaller investors, Sweet maintains. While not every company worth £30m will grow like Capita into one worth £3bn, by ignoring the small cap market you miss out on the one area where private investors can and do make huge returns.
In 2001, it was no surprise that the top 20 performing shares were all in the FTSE SmallCap and fledgling indices at the start of the year.
It was the same in 2000 and it would be brave to suggest the pattern will not repeat again in 2002.
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