Portfolio Restructuring - Comments Please

grey_gym_sock

Linton wrote: »

Suggest you look up the performance of the UK Small companies fund sector in the past 25 years. Since 1991 the IA UK Small Company fund index is up around 1300%, the FTSE AllShare about 600%, both with dividends re-invested. Is there a UK Small Cap Premium?

what matters is: will UK small-caps outperform UK big-caps over the next 25 years?

on those figures, they outperformed by about 3% a year over the last 25 years. (i don't really like using IA sectors as a measure, but in this case i expect the answer is in the right ballpark.)

but the next 25 years - we don't know.

but it seems strange to me to suggest there is a small-cap premium in some countries but not in others. the plausible explanations for a small-cap premium would apply to any country.

the differences in performance in different countries are most likely due to the different mixes of sectors in each country's big- and small-cap shares, and to different exposure of companies in each country to different economies.

big-cap companies generally do business more internationally, so are less exposed to individual economies. the odd performance of UK big-cap appears to be due to its unbalanced sectoral composition. banks and resource extraction have done poorly in recent years, so the FTSE 100 has done poorly. does that means that it will always do poorly? no: there is no reason to believe there is any "sector premium"; and if the sectors which dominate the FTSE 100 do well, so will the FTSE 100, and in that case it could easily outperform UK small-cap for a while. the FTSE 100 isn't a poor index because it's had low returns in recent history: it's a poor index because it's a poorly diversified way to get exposure to big-cap companies. it's better to get your big-cap exposure more internationally.

small-caps are generally more exposed to the economies of their home country, e.g. UK small-caps to the UK economy. which means they tend to perform differently to big-cap, and also differently to small-cap in other countries. for me, that is a good reason to have some exposure to small-cap in many different countries: it improves your diversification. i do, to some extent, expect small-caps to outperform big-caps overall, but that is a less important motivation for me, because i don't have great confidence in that. but given that small-cap in different countries tend to perform differently, one would expect some to have good performance records, others less so - and that could include some of them doing worse than big-cap. so i just see the varying records of UK and US small-cap as what i'd expect, not as evidence for a small-cap premium in one country.

masonic

The FTSE100 and FTSE250 actually had pretty much the same performance in the 17 years from 1986 to 2003. It seems it was only after that that the annualised performance of the FTSE100 was cut in half, while the FTSE250 carried on at around the same pace as before.

Linton

masonic wrote: »

The FTSE100 and FTSE250 actually had pretty much the same performance in the 17 years from 1986 to 2003. It seems it was only after that that the annualised performance of the FTSE100 was cut in half, while the FTSE250 carried on at around the same pace as before.

You get an even greater out-performance of the Euro SCs compared with the FTSE Europe Index than with the UK. Its a bit difficult to blame that on the poor diversification of the FTSE100.

One thought as to why the Small Caps performed much the same as the wider index prior to 2003 is that it could be the influence of online investing and the resulting greater availability of access to SC information and investments to the private investor.