United Kingdom

Is now the time to get your money back into small, high growth stocks?

Smaller companies are often seen as an investment opportunity following a slump, and now wealth managers and IFAs are strongly in favour of the sector.

According to a survey by investment holding company MBH Corporation, 94 per cent of institutional investors and independent financial advisers believe the small and micro-cap sectors currently represent good opportunities for investors.    

Some 86 per cent say investors should increase their allocation to these markets as, despite taking a hit earlier this year, which saw UK small-cap funds fall by more than 35 per cent, they now 'represent excellent value'.

The FTSE UK Small Cap index has beaten the blue chip FTSE 100 over the past three months

Callum Laing, chief executive of MBH Corporation, said: 'The coronavirus has had a more severe impact on the share price and valuations of smaller businesses than larger ones, but there are still many very profitable and well-run small enterprises that now represent excellent value for investors. 

'With less coverage from brokers and research houses on these sectors, attractive investment opportunities here will increase.'

As was the case across the globe, UK smaller companies bore the brunt of the financial fallout in March compared to their larger counterparts. 

The FTSE 100 is down 17 per cent from 1 January to 3 July, while the FTSE UK Small Cap is down 24 per cent.

However, recovery is on the horizon with the latter having bounced back by 23 per cent since the start of April, ahead of the FTSE 100, which has returned just over 14 per cent during the same period.

Francis Gill is an independent financial adviser at Humboldt Financial and is positive about the outlook for smaller companies

Francis Gill, director at boutique financial service consultancy Humboldt Financial, said he expects smaller companies to 'boom' in 2021.

'Although we anticipate smaller companies will only do okay over the next few months due to uncertainty of business reopenings and the looming question of Brexit. 

'However we expect they will boom at the start of 2021 due to less UK investment from Europe, and so more opportunities for smaller businesses to grow and acquire clients and customers that would have been serviced by European companies.

'Coupled with the fact that medium and smaller sized companies perform strongly when coming out of a recession too, we have a positive outlook on smaller companies, and they feature in all our equity based model portfolios.'

Gill also believes increased redundancies in the short-term will create an opportunity for employees to step back and decide what they want for their work/life balance and consider options away from a nine to five job. 

He added: 'A smaller, more agile business may give them the opportunity to do that going forward, so the long-term outlook for the sector is great as there is likely to be a rich talent pool entering it over the coming months and years.' 

Meanwhile, Ken Wotton, manager of Baronsmead VCTs, said smaller companies might be one of the best places to look for income in the current environment.

'Savers have traditionally relied on FTSE 100 companies for income, but there are plenty of opportunities in the smaller company space, with more consistent payout policies,' he said.

'Instinctively, smaller companies may appear more vulnerable to economic difficulties, but some are dominant in their niche markets, and are relatively insulated from macro dynamics. 

'If anything, this misconception provides an attractive entry point into smaller companies, which are trading at a substantial discount to large caps currently.'  

Despite their more volatile prices, smaller companies are often perceived to provide the best opportunity for returns over the long-term, but investors should always remain cautious.

FundCalibre's Darius McDermott said smaller companies can be an excellent choice for investors with a long-term horizon and who are willing to take on more risk

Darius McDermott, managing director of independent fund research company FundCalibre, said: 'Smaller companies can be an excellent investment for investors with a long-term investment horizon and who are willing to take on more risk and the valuations are certainly more compelling right now.

'However, this recession is likely to be very deep, and no-one knows how long it will last, so there are bound to be many businesses that struggle and go bust.

'That said, there are always winners, and those that do survive could find themselves in much stronger positions going forward.

'As always, good stocking picking skills will be paramount, and investors might like to consider smaller monthly contributions rather than a larger lump sum at this stage.' 

Small cap stock picks 

Liontrust's Victoria Stevens works within the firm's UK small and micro cap teams

Mind Gym - Victoria Stevens, Liontrust UK Smaller Companies and Liontrust UK Micro Cap funds   

'Mind Gym is a corporate training business which applies the principles of behavioural science to effect change within the corporate environment. 

'We believe it possesses strong proprietary intellectual property within a suite of bite-sized tutorials, or “workouts”, and enjoys significant distribution strength, having built up a network of hundreds of self-employed coaches across the globe.

'The Covid-19 crisis caused momentum to stall from February 2020 as clients began to cancel planned face-to-face training. However, the company has a very strong balance sheet and used the disruption to accelerate investment in its virtual and digital training proposition.' 

Clipper Logistics - Leigh Himsworth, Fidelity UK Opportunities fund

'Clipper Logistics is involved mostly in distribution and logistics for retailers, in particular online retailers such as Asos. 

'Their strength lies in the flexibility of their model that allows movement of stock in either direction, so allowing them capable of coping rapidly with returns, which is vital for the success of the likes of Asos.

'The recent pandemic has seen a jump in interest in their services from supermarkets and high street retailers, as they seek to improve the resilience of their supply chains and robustness of their systems.

'Clipper could prove to be very much a multi-year success story.'

Bioventix - Ken Wotton, Baronsmead Venture Trust

'Bioventix is a research company focused on producing antibodies for clinical diagnostics and pharmaceutical research. 

'Due to its highly cash generative business model, the company – which offers a dividend yield of two per cent – has a fantastic record of dividend growth over the past few years, with a compound annual growth rate of 30 per cent over five years.

'This means if you bought shares on 1 July 2014, more than 80 per cent of your original cost would have been returned in dividends and your capital would have appreciated by 750 per cent.'

Michelmersh Brick - Andrew Vaughan, SDL Free Spirit Fund

'This AIM-quoted business with a market cap of £100million produces high quality and locally distinctive premium-priced bricks, achieving average selling prices some 35 per cent above the wider industry norm. 

'Covid-19 measures halted UK production for much of April, but Michelmersh’s more fully automated Belgian operation was less impacted, and group operations returned swiftly to 75 per cent of the 2019 equivalent in May. 

'Financial performance has been on a strong upward trajectory for five years now and the business has some longer-term additional income potential from landfill and land development activities at its sites.' 

Walker Greenbank - Jonathan Winton, Fidelity UK Smaller Companies fund 

'Walker Greenbank manufactures interior furnishings under the brands Sanderson, Morris & Co, Harlequin, Zoffany, Scion, Clarke & Clarke. 

Lisa Montague joined Walker Greenbank as chief executive in March 2019

'The share price is down 50 per cent since the start of the year and the business has been significantly impacted by lockdown and concerns about the housing market.

'However, it has managed the crisis well, and has now reopened its factories. Whilst this year will be difficult, the business is well positioned once the economy emerges from recession, with a stable of attractive brands with UK and international potential. 

'The new chief executive, Lisa Montague, has a strategy to improve brand engagement and transform the business, which is sensitive to the economy, but has lots of self-help and recovery potential.'

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