Investing in the minnows

THE successful rollout of Covid vaccines and the re-opening of large swathes of the economy have boosted recovery hopes with UK stock markets rising along with investor sentiment – writes Holly Thomas

With the new tax year now under way, investors with a fresh ISA allowance of £20,000 to allocate may be looking for ideas and opportunities. While the biggest companies might be listed on London’s main stock exchange – the FTSE 100 – there are plenty of investors who prefer to back lesser known, smaller firms and wait to cash in when they hit the big time.

Small and medium-sized companies have the potential to grow faster and further than larger firms, providing the potential benefit of capital growth as well as income. To access such firm, investors look at companies listed on markets such as the FTSE 250 and the FTSE Small Cap.

FTSE 250 Index

The FTSE 250 Index covers the 101st to the 350th biggest firms on the stock market and contains medium-sized companies – known as midcaps. Typically it houses domestically focused stocks, which are arguably a far better barometer of the UK economy.

The index has just hit a record high with brands such as Carnival Cruises, shopping centre owner Hammerson and Upper Crust owners, SSP, all bounding higher as we move into the next stage of reopening locked down industries.

The FTSE 250 is also home to a large number of investment trusts which themselves invest outside the UK. Fidelity China Special Situations, Schroder Asia Pacific trust, and JP Morgan Japanese Investment trust are just some of the names that can be found in the index.

The success of midcaps is not just a flash in the pan, however. They have an impressive track record of being capable of paying attractive returns. Over 20 years the FTSE 250 has turned £10,000 into £62,859, comfortably beating the FTSE 100 (£25,181) and the S&P 500 (£49,389).

FTSE Small Cap Index

The FTSE Small Cap Index consisting of the 351st to the 619th largest-listed companies on the London Stock Exchange main market – has been marking new record highs since December.

Stocks including Saga and Ten Entertainment group, the UK’s second largest bowling operator, have been boosted by the promise of travel and leisure, among others, opening up again. Again, the returns over the long term are impressive.

The FTSE Small Cap has turned £10,000 into £41,395 over 20 years.  Mid and small cap stocks can produce higher levels of volatility, and smaller firms are more likely to fail. Yet long-term investors might consider gaining exposure in their portfolios.

If you don’t fancy taking on the job of selecting the potential winners of tomorrow yourself, you can outsource the work by investing in a fund where the manager will choose the stocks on your behalf.

Along with their teams, managers will typically be on the lookout for a company that has come up with something innovative that will grow faster than the economy and broader market.

There are plenty of funds specialising in small companies – some have been among the best performers overall so far this year. Premier Miton Smaller Companies and Aberforth UK Small Companies are among the top 10 best performers in the first quarter of 2021, according to AJ Bell.

There is a smaller number of funds offering exposure dedicated to medium-sized companies – and there is no midcap sector. As well as funds and investment trusts run by managers, there are tracker funds that offer exposure to the FTSE 250 and FTSE Small Cap indexes by simply mimicking the index.

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