It's a mini adventure: if a big company is supposed to be beautiful for institutional investors, does that mean small is successful, sexy or suicidal? Independent research is the key to knowing.
| Author | Stewart, Jamie |
| Position | City |
Many investors' injured pride and disbelief at the way in which UK smaller companies have stolen a march on the leaders in recent years have left them seeking credible reasons for what they missed and why.
Over the past four bearish years, the FTSE 250 and small cap indexes have outperformed the FTSE 100. >From January 2000 to January 2004, the FTSE 250 Value Index has given 7.08 per cent annualised returns and the UK Small Cap Index 2.16 per cent. This contrasts with a decline of 9.38 per cent for the FTSE 100.
Can we learn anything from what has happened here? Hindsight is astonishingly helpful in providing--and even fabricating--conclusions. The real value lies in defining the trends that will hold good for some time, rather than explaining yesterday's successes.
There's an understandable case for saying that the Technology leaders--their prices surging as the dotcom boom escalated shamelessly and institutions felt compelled to chase them upwards--left the mids and smalls well behind in the late 1990s. The moment came when technical analysts, the momentum and rotation fanatics, the "quants" and the value-hunters all spotted the widening arbitrage opportunity and went for it, despite the well-worn cautions. The mid, small and micro cap indexes outperformed the leaders as they started to tire. When it all went soggy in early 2000, investors in the liquid large cap shares turned and ran, but those holding the smaller companies hung on and effectively protected their own prices.
After that, the recovery-seekers and bottom-fishers joined those who recognised the resilience of the smaller stocks and bought more of" them, lifting prices and profiles. So it was that the lesser caps significantly outperformed the bigger ones on both the upside and the downside, not to mention the recovery that has followed.
Unsurprisingly, supply and demand have had a leading role to play in this. Growth in terms of the number and value of new listings of smaller caps relative to the market overall has slowed over the past 15 years--and more so during the cyclical downturn of the past five. There has also been an increase in the number of de-listings that have made companies private again. The hidden virtue of de-listing is that the weaker firms, with fewer prospects and less robust cash positions, may disappear and thereby improve the relative position of their competitors and indexes.
The demand side has seen the emergence of a greater number of sophisticated...
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