uk smaller companies

frugal90

uk smaller companies have had a great run over the last couple of years - any predictions for the next couple after a wobble over the last week or so?

Thrugelmir

Invest in companies not markets. There's often money to be made in smaller companies but they need to be followed carefully on an individual basis.

bowlhead99

You're right they have had a good run, I recently scaled back a bit more on UK mid and small caps (and US small caps). If you have something that delivers many tens of percent in only two or three years, and the rest of your portfolio hasn't also delivered the same return, you might be too heavy into those ones at the expense of whatever the next big thing is, and the sectors that have fallen may need topping up.

So for me, some rebalancing was probably in order, to avoid coming down to earth with a bump - gains are not yours until you take money off the table. I still have some exposure to those sizes of companies through funds, just less than I did. And within my 'individual shares' basket that I'm particularly following, small and mid ones still feature prominently just because they generally interest me more.

I wouldn't tell people to stay away from small companies, but the danger is that inexperienced punters hear that small companies are risky with high growth potential, look at the chart for the last five years and see it's been pretty much one way gains. Then they think the risks of a 'bit of a dip' are worth it for gains of that size, and just go and buy whatever microcap fund seems to be flavour of the month at their DIY platform of choice. My general instinct is that 'whatever has just gone up the most', if the timescale is 3-5 years or so, is probably not going to be what goes up the most, next.

For some types of companies there's definitely a disconnect between how their share prices have moved versus their fundamentals in the last few years. Some of this is just the completion of the reversal of the 2007-2009 slump, where the share prices went down more than their fundamentals, so, fair enough.

But now we've reached the point where people are talking about the recovery being in full swing, it's clear that QE and low interest rates are not going to be around forever. So the beneficiaries of these will lose the momentum they have had, and will have to go back to being valued on what fundamental profits they generate and what growth they can get out of the true economic conditions without having their egos massaged by loose monetary policy. This is a risk for all equities of course but the markets for the last couple of months have already shown that maybe tech stocks and small/mid cap valuations are more precarious than others.

It's difficult to find something cheap these days. Mid- and large-cap dividend payers are not cheap compared to long term measures, because people were flocking to them since interest rates and bond yields dried up. But it's been several years since that started to happen and we've kind of got used to those prices. While by contrast the smaller ones have continued with their fast rising, even moreso as we exited recession and people became more risk-minded.

So I think the smallcap and midcap generalist funds have a more marked reduction in store for their stratospheric growth rates than perhaps some bigger companies.

Different fund managers have different ideas as to what are 'smaller companes'. Some will look at AIM and some microcaps. Others will say a billion is still small compared to a hundred billion and so will include FTSE 250 companies on their shopping list. If you look at FTSE 250 valuation to profits, and valuation growth to profits growth, overall they are at pretty high historic levels compared to say pre-crash 99/2000. Relatively more so than FTSE 100 I would think.

The fact we had a crash in 2000 or in 2008 or whatever doesn't mean we are 'due' one now, but serves as a reminder that if you let things keep on bubbling high, they will at some point have to reverse when common sense takes over. That might be next month or in two years time or in five years time, who knows. So don't sell all your smallcaps. But if you're adding cash into your portfolio, don't spend it all on smallcaps!

Linton

Thrugelmir wrote: »

Invest in companies not markets. There's often money to be made in smaller companies but they need to be followed carefully on an individual basis.

You as a private investor are not going to get the access to the information you would want to properly assess individual small companies unless you have specialist knowledge, perhaps from your work. If you invest in individual small companies you would need to hold a relatively large number to achieve diversification, this implies a significant amount of money and significant time to do the necessary research.

So in my view for the average investor small companies really requires managed funds.

Linton

frugal90 wrote: »

uk smaller companies have had a great run over the last couple of years - any predictions for the next couple after a wobble over the last week or so?

No-one knows. Predictions are worth nothing. To invest in the riskier areas you should be thinking of decades, not a couple of years.

quotememiserable

Thrugelmir wrote: »

Invest in companies not markets. There's often money to be made in smaller companies but they need to be followed carefully on an individual basis.

Couldn't disagree more. No-one knows enough about individual companies to meaningfully predict what will happen, and in any case most information publicly known in factored into the price. I think individual company investments are very speculative, and I'd much rather go with a market. Unless you are a speculator rather than an investor.

bigadaj

It's a strong recommendation for rebalancing, though virtually nothing looks like good value currently, yields still look attractive on larger uk companies, but I'm overweight in this area in any case.

nxdmsandkaskdjaqd

I had been concerned by the Smaller Companies in particular Schroders Dynamic Smaller Companies for some time now. It appeared to me that when they closed the fund and then Schroders took over, that this had an significant impact on the fund. It would now appear that this is more wide spread across all the smaller companies fund. Any one know the specific reason why this has happened?

I have over the last period been reducing my holding of this fund.

IronWolf

I invest in smaller UK companies on an individual basis. There are usually some good opportunities around, particularly on AIM but you have to be careful because spreads are wide and regulation is a lot lighter. I would not get into it unless you know what you're doing and have the stomach for the high volatility in small caps. My stocks have moved over 100% in a single day before, most of the time a 20% move in a few weeks isn't uncommon. You need strong reasoning and conviction to make money in there.

planteria

i am broadly working on the basis that i can manage my own FTSE100+ portfolio myself, rather than invest in a Woodford fund, for example, but then leave smaller companies to Giles Hargeave

consensus seems to be that larger companies are 'better value' at the moment, but as Thrugelmir says "Invest in companies not markets":)

coastline

Small and mid caps have drifted lower since March....a good example is the Russell 2000 which hit highs recently.
Note where the P/E values are in comparison with recent decades.

http://blog.kimblechartingsolutions.com/wp-content/uploads/2014/03/russell14yearresistancevaluationshighmar24.jpg