Comment from Colin McLean, managing director, SVM Asset Management
Recent years have seen strong performance in medium sized companies. The companies in the FTSE Mid 250 Index tend to be less well researched than those in the FTSE 100. Fewer interested stockbrokers analysing them means a greater chance that the shares will be mispriced. Despite the number of medium sized businesses, for the biggest investment banks and institutions, the area is still under the radar. The largest three companies listed on the London market – Royal Dutch Shell, HSBC and British American Tobacco – add up to more than the combined value of all 250 mid cap businesses.
The largest companies listed on the Alternative Investment Market (AIM) are also interesting. It’s an area of lighter regulation and more risk, but home to some recent stockmarket winners. Online retailer, ASOS and mixer drinks group, Fevertree are good examples.
Conventional wisdom is that the popular index funds pile into the biggest companies and blue-chips are inherently safer, but the facts will surprise many. Over periods of three years and more, for the entire 30 year life of the FTSE Mid 250 Index, medium sized companies have tended to outperform the very biggest. Even taking risk and volatility into account, the extra reward is still attractive. It goes against the grain – surely such an obvious opportunity would be quickly competed away by big smart institutional investors?
Many insurance and pension funds are very large and would find it hard to build up meaningful holdings in these companies. Opportunities only tend to come along when companies raise new money. But, many of these businesses have structured themselves to make much less use of external capital. This has allowed their businesses to be quickly scalable, as seen with Fevertree’s rapid ascent. This is a key characteristic of disruptive businesses, which must move quickly as they enter a new area, taking business from a longstanding incumbent.
After initial listing, these companies offer less opportunity for institutional entry. Bigger institutions trying to buy in the stockmarket can quickly push up the price, but this is not a problem for private investors and many unit trusts. The average unit trust picking shares across the whole range of the FTSE All-Share Index, and not confined to the biggest companies, has outperformed over similar periods to the FTSE Mid 250. The anomaly is no secret, but clearly only useful for private investors and certain funds.
The tailwinds for mid-sized companies and some of those listed on AIM, are inclusion of more technology and high growth businesses. Some of these are disrupting much bigger businesses, undermining long-standing brands and services. In this turbulent environment, the biggest global businesses are no longer safe.
If you would like to speak with Colin please contact Danae Quek /Monika Witkowska, firstname.lastname@example.org, 020 3697 4200.