Page 36 - DIY Investor Magazine - Issue 23

INVESTING IN BRITAIN: BEYOND THE FTSE 100
Guy Anderson, lead investment manager for The Mercantile Investment Trust, explains the benefits of investing in mid and small cap UK companies, and explains the thinking behind some of the Trust’s more interesting holdings.
As the British body politic continues to suffer from the fevers and convulsions brought on by Brexit, you might think me a brave soul to beat the drum for investing in UK businesses. If so, smaller, less-established firms outside the FTSE 100 may seem a particularly hard sell.
However, for investors focused on the long term there has arguably rarely been a better time to invest in UK mid and small cap companies. Allow me to explain why.
THE CASE FOR UK MID AND SMALL CAPS
While the uncertain state of British politics may affect UK share valuations, the intrinsic value of the best stocks remains strong.
Quality companies with strong fundamentals will be resilient enough to survive the current climate and will be well-positioned to thrive once the political landscape settles down. In the meantime the general headwinds caused by Brexit are making the valuations of some
UK equities extremely attractive. Mid and small cap UK equities in particular offer two key strengths.
‘QUALITY COMPANIES WITH STRONG FUNDAMENTALS WILL BE RESILIENT ENOUGH TO SURVIVE THE CURRENT CLIMATE AND WILL BE WELL-POSITIONED TO THRIVE ONCE THE POLITICAL LANDSCAPE SETTLES DOWN.’
Firstly, they provide the opportunity to diversify beyond the typical holdings in a FTSE 100-focused fund. Secondly, they provide access to the stronger growth potential of firms who are at an earlier stage of their development trajectory.
Over the last 60 years, mid and small cap stocks in aggregate have outperformed the overall market in
two years out of three. Not only that but cumulative performance of mid and small caps has historically been strong, even when holding through bumpy periods. For the longer-term investor, the potential benefits are clear with returns among the best in the world.
LONG-TERM OUTPERFORMANCE OF UK MID AND SMALL CAPS
Source: J.P. Morgan Asset Management, Reuters Datastream. All series are rebased to 100 as at 31 December 1993 to 30 April 2019. All indices in GBP and include reinvested dividends. Indices do not include fees or operating expenses and are not available for actual investment.
DIY Investor Magazine | Oct 2019 36