Smaller Companies Hot – 9.6x The Index – Income, Time For Change?

Fri 31 May 2024

By Brian Dennehy

Access Level | public

Market commentary


quoteAll this talk recently of U.K. revival, most recently smaller companies, must be getting tedious. But here I go again…

In this month’s What’s Hot (fund edition) UK Smaller Companies dominate with 7 of the top 10 positions. While some of you were chasing Nvidia-fuelled bubble returns (in S&P 500 trackers?) the real action was right under your nose in Blighty. Two technology funds do feature after another decent set of results from Nvidia, but when that share price implodes - and it will at some point - the main US stock market indices are extremely vulnerable.

For example, yesterday the Dow Jones (representing just 30 large US stocks) suffered a fall of 364 points after a 19.5% crash in one company (Salesforce), even though 20 of that indices constituents were up for the day. Similarly, Dell went up 25% last week on the coat tails of Nvidia, then lost ALL of that gain last night. Being invested into big companies, particularly those quoted on the US stock market is no protection from outsize losses.

In contrast, there is no U.K. Smaller Companies valuation bubble nor investor mania to act like a trap door for prices. If the recent positive trend holds, history suggests it should persist for years. Although it has been a difficult and very volatile year or three, it is good to remember that in 13 of the last 20 years UK small caps have outperformed the wider stock market.

On which point, do use our Best Funds By Sector tool to identify the winning UK Small Cap funds right now. As you will see, you can choose to include Investment Trusts in your search (use the “Combined Universe”) and you can also adjust the look-back period, and you will see 3 months as well as 6 months.

Out of interest, these are the performance numbers for the Dynamic UK Smaller Companies portfolio from October 1999, a terrible time to begin investing:

Dynamic UK Smaller Companies portfolio 2224%
FTSE Small Cap ex IT                     340%
FTSE 100             232%

To summarise, the Dynamic portfolio, based on a straightforward process, achieved returns 6.5x better than the equivalent index, and 9.6x the FTSE 100 index. For the avoidance of doubt, the indices have income re-invested, and the portfolio numbers are after fund charges.

As we have previously highlighted, even if U.K. Smallers are bargain basement and attracting global investors, there are plenty of similar opportunities around the world.

Close to home, European Smaller Companies will undoubtedly benefit as the ECB begins to cut rates (June?). Further afield, regular readers already know that modestly-sized Japanese companies are extremely cheap. As such it was surprising that two funds in this sector have appeared in the duds for the last month. We will update further on Japan next week. Spoiler alert - I’ll likely be saying it’s a buying opportunity!

An interesting “metals” fund also squeezes into the top ten this month, as you will see. It is a small fund, but this gives it flexibility to have an exposure to in-demand metals which much larger funds cannot achieve in the same scale. Interesting one. Just be careful that you understand the risks properly, definitely high risk.

Predictably, two U.K. sectors appear in the top 5 Hot sectors for the month, along with European Smaller Companies, commodity funds, and technology.

The only missing U.K. sector in the latter is the U.K. Equity Income sector, which is only just outside the top 5, up 3% for the month. If you are an income investor you need to pay attention to this sector if you aren’t already doing so. Here’s why.

In 2023 income investors got a break because a 4%+ yield was available from Cash Funds. Though no one knows precisely when UK rates will fall, you must assume that they are going lower.  You can wait to switch out of Cash funds when that happens. But the problem is that at that point UK Equity Income funds, might well have already moved notably higher, and they are already heading in that direction.

For example, assume that today you can achieve a yield of 4% on such a fund. If that fund goes up 10% between now and when you switch out of Cash funds the yield is then down at 3.6%.

If you are feeling nervous about making this adjustment out of Cash funds, that is perfectly understandable, as you are investing your life savings at a time which is deeply uncomfortable from an investment perspective, as well as coinciding with a pivotal point in your life cycle, when you can’t go around the block again to re-build your savings. We have a solution…

If you would like to delegate the stress, giving you the time to focus on other priorities, consider our Income Portfolio. Simply email one of my senior colleagues Joe Richardson – – and he can guide you through this solution.


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