But is it possible to be that simplistic when you are talking about a universe that covers literally thousands of companies – most of whom run pretty niche offerings?
Small and mid-cap managers are split over their prospects for next year. While a recent conversation with Giles Hargreave, Marlborough Fund Managers’ small cap expert left no question over his long-term bullish stance over his asset class, irrespective of market timing, Standard Life Investments’ Harry Nimmo seemed more muted with his outlook, tempering his long-term conviction over smaller companies with a balanced, somewhat defensive approach to his portfolio construction.
Recent UK GDP forecasts have had commentators suggesting that earnings from mid and small caps are expected to continue their outperformance into next year as the UK’s core cyclical sectors look set to surge. Mid-caps in particular are supposedly well-placed to maximise economic upswing in a cycle.
Certain commentators would argue that such generalisations are difficult to predict accurately while several brokers are starting to make the case for larger companies.
Reversal of fortunes?
Darius McDermott from Chelsea Financial Services says as small and mid-cap stocks have outperformed so significantly in this year, a reversal of fortunes might be on the cards, with large and mega caps doing better.
If investors can look forward to a domestic economic recovery they might want to shift their attention away from mid and small companies, which experienced significant outperformance over blue chips over the last year.
Whitechurch Securities’ managing director Gavin Haynes says: “These areas of the market could continue to benefit from the improving economic environment and increasing merger activity may boost them further as business confidence improves.
“However, following such a strong run of performance, valuations in mid and small companies are not as compelling and many blue chip stocks that have lagged in the recovery are now looking good value.”
Over all time periods to 6 December, FE Trustnet data shows that IMA UK Smaller Companies has significantly outperformed its UK All Companies and FTSE All-Share peer groups, posting 200.5% over 10 years compared to 125.03% and 115.59 respectively.
Over one year, the comparable figures are 34.56% against 22.47% and 15.12% for the FTSE.
This might not be surprising, are less mature businesses and tend to be more focused on growth and domestic in nature. Small caps can boost their own growth, reinvesting profits and sitting largely unconstrained by limitations over bank lending. They obviously introduce diversification and potential for higher returns, but with those come a higher element of risk.
Focus on valuations
But it’s not that easy to give a broadbrush view.
Mark Dampier, head of research at Hargreaves Lansdown, said his jury, as it was every year, was out and that no one could call a sector at a particular time of year. However, based purely on valuations, he felt there could be further to go.
“[Small and mid-caps] are certainly not showing silly prices. But if you look at the large and mega caps, it’s still the macro environment that is driving it all. I think as with anything, you can look at the annual figures but it’s far more sensible to take a longer term view, and that applies whether looking at small or large cap.”
He added the last time large caps had a period of solid outperformance was between 1997 and 2000, when Richard Branson enjoyed a “stroke of luck” as it coincided with the launch of his Virgin FTSE 100 tracker.
Dampier suggested that when the FTSE is surging ahead there is no better place to be than a tracker.
He calls the current landscape a no-man’s land, where things look neither expensive nor cheap, but he recalled a recent meeting with one of his favoured equity teams over at Old Mutual Global Investors which saw them allocating further down the market cap spectrum.
“If those guys are moving into smaller companies, it tells me that the story isn’t over yet.”
