So here is another attempt, to accurately argue the same point…
The small cap indices have significantly out-performed their larger rivals over the past year, having lagged both, over discrete years at least, both for pushing the past five years.
The FTSE Small Cap Index has returned 1.72% in the past year compared to -3.87% for the FTSE 100 and -2.16% for the FTSE 250. For the 12 to 24 months prior to this the mid caps led the way, with FTSE 250 returning 17.11% against 14.93% for the FTSE 100 and 6.02% for FTSE Small Cap. FTSE 100 was then the biggest loser for the 12 months prior to this, FTSE Small Cap for the previous 24 months.
In the closed-ended world, the same small cap story holds as smaller companies have dominated over the past year.
Figures from the Association of Investment Companies suggest that “investment companies with a smaller companies focus have invariably outperformed in share price terms over the last year, and this extends across the board”.
The average UK smaller companies investment company is up 21% over the past year compared to 9% for all investment trusts and 5% for the UK Growth sector.
Japanese Smaller Companies is also up 21% compared to an 11% average for the Japan sector; European Smaller Companies are up 13% compared to the industry average and 6% rise to the Europe sector.
In Asia Pacific excluding Japan, the first and third-performing investment companies have a smaller companies bias – Aberdeen Asian Smaller Companies (27%) and Scottish Oriental Smaller Companies (21%) compared to an average of 6% for the Asia Pacific excluding Japan sector).
North American Smaller Companies let the side down with a fall of -1% over the year to the end of August.
The obvious question is ‘Where next?’.
Adam Steiner, manager of Strategic Equity Capital, says: “The outlook for smaller companies is very strong.”
Mark Watts, manager of Marwyn Value Investors Limited, says: “The outlook for smaller companies in the UK remains one of concern with the root causes stretching back 20 years, long before the recent market turmoil.”
Of Asia specifically, Hugh Young, manager of the Aberdeen Asian Smaller Companies Investment Trust, says: "We would expect smaller companies to outperform mainstream companies over the longer term, although periods of mispricing and illiquidity mean investors must be patient.”
As with my previous argument, an equally obvious answer is that both large and small caps have their benefits right now, but the real skill is still the asset allocation, fund/manager selection and allowing those investments the time to perform.
Using past performance would indicate that small caps having a great 12 months is often the sign of the start of a rally. But you know what they say about past performance…
