Investing in UK stocks? Here’s why you shouldn’t ignore smaller companies

Money

Going against the grain and investing in the UK’s home-grown smaller companies could have been the best way to protect against large losses after volatility returned to markets with a bang this year.

Funds invested in UK small caps were the best at navigating falling stock markets in the first three months of the year according to research by the multi-manager team at investment firm BMO Global Asset Management.

It’s quarterly FundWatch survey found funds in the Investment Association Smaller Companies sector were the top performing out of all UK equity sectors in the first three months of 2018, weathering the storm by limiting losses to 3.1 per cent.

The Smaller Companies sector has also been the most consistent for returns over a longer time-frame the BMO team found with more funds achieving returns for three years in a row

The Smaller Companies sector has also been the most consistent for returns over a longer time-frame the BMO team found with more funds achieving returns for three years in a row

The Smaller Companies sector has also been the most consistent for returns over a longer time-frame the BMO team found with more funds achieving returns for three years in a row

Most IA sector’s average returns fell between January and March this year as global markets tumbled, with 32 out of the 37 sectors down on the previous quarter.

The UK All Companies and North American IA sectors suffered the most with losses of more than 6 per cent, double the losses of the Smaller Companies sector, while the IA Japanese Smaller Companies sector managed to gain 1.5 per cent.

The Smaller Companies sector has also been the most consistent for returns over a longer time-frame the BMO team found, with 6.4 per cent of its funds producing top quartile returns for investors over three consecutive years.

‘Top quartile’ refers to funds which are among the 25 per cent best performing of all funds available.

It has also been the most consistent sector for producing above-average returns for three consecutive years with 17 per cent of funds in the sector managing returns above the median level.

Funds in the UK All Companies sector and the Europe ex UK sector were the next best performers with 2.9 per cent and 2.3 per cent of funds producing top quartile returns for investors over the last three years respectively.

However a fund producing consistently top returns over long timeframes is a rare beast.

Only 19 out of 1,118 funds in an Investment Association sector have produced top quartile returns for investors over the last three years and four of the 12 sectors have had no top quartile funds in the last three years at all.

Global stock markets suffered a sharp downturn during a number of sell-offs from late January onwards, wiping millions off the value of indicies from the US to China, including in the UK

Global stock markets suffered a sharp downturn during a number of sell-offs from late January onwards, wiping millions off the value of indicies from the US to China, including in the UK

Global stock markets suffered a sharp downturn during a number of sell-offs from late January onwards, wiping millions off the value of indicies from the US to China, including in the UK

Kelly Prior, investment manager in the BMO team behind the research, said: ‘The first quarter of 2018 bought with it some much anticipated volatility which saw most IA sectors down on the previous quarter. The UK Smaller Companies sector was the stand-out performer of the quarter, securing the highest proportion of funds delivering consistent returns.’

‘It also weathered the dip in markets in February driven by a bout of volatility better than most of the other IA sectors.’ 

‘Whilst we have seen an uptick in funds delivering top quartile returns over three years, our survey shows still only a small proportion of funds are delivering over the long-term, falling short of the historic average,’ she added. 

This lack of consistency in returns is a continual trend in the fund market, BMO noted.

Of the better performers, the IA Global Bond and IA Sterling Strategic Bond sectors still only had 14.3 per cent and 14.1 per cent of their respective funds producing top quartile returns for three consecutive years.

The IA UK Income sector has been the least consistent, closely followed by the IA Europe ex UK sector with just 6.3 per cent and 6.8 per cent of funds achieving consistency respectively.

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