Big caps are back

Tuesday, Jul 05 2016 by

Over the last few years the salient feature of equity investing has been the outperformance of the small and mid-cap stocks at the expense of large cap shares.

The simplest way to demonstrate that is to contrast the 25.3% total return of the FTSE 100 over the last five years to 31st May with the 63.5% return of the FTSE 250 over the same period.

During that same time the FTSE Small Cap index increased 59.2% so it is not a straight forward case of saying the smaller the company the better the performance. Even so, it is clear that the big blue-chip companies that so dominate the stock market in terms of valuation, cash generation and news flow have lagged behind their smaller listed brethren.

Some of that has been a result of re-rating. Larger companies are often seen as dividend paying cash-cows while the mid-caps might be viewed as nimbler and more agile competitors able to exploit niches in their markets. As a consequence the valuation measures applied to larger companies have drifted lower while the mid-caps have edged upwards. Nevertheless, earnings have probably grown a little faster for the constituents of the 250. It is important to remember though that the 250 companies in that sector only account for about 17% of the market capitalisation of the FTSE 350 Index.

Even before the sharp moves triggered by the surprising result of the EU referendum there were signs that change was in the air as the 250 lagged the 100 index over the first five months of the year. In June that difference increased with a near 6% fall in the 250 in contrast to a 2% rise in the 100 so that in the first six months mid-cap shares have lagged the big caps by 11.8%. That may not sound very dramatic but when markets are doing little, or declining, it makes a huge difference to relative returns. Nowhere is that more obvious than in the discrepancies between the performance of active funds and passive funds where, among many differences, probably the largest is the overweighting to smaller companies in the majority of active funds.

Maybe active managers feel that this group is less well researched than those in the FTSE 100 or perhaps it is function of active funds selecting less…

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Past performance is not a guide to future returns. The value of investments and the income from them may go down as well as up and is not guaranteed. An investor may not get back the amount originally invested. For risks relating to specific products, please refer to the relevant documentation for that product.

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6 Posts on this Thread show/hide all

herbie47 5th Jul '16 1 of 6

It's not just the last few years, the FT100 has hardly gone up in the last 16 years, whilst the FT250 has gone up about 150%. Yes it did fall more around 2008 but since then it really took off. Here is a chart:

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Rob Davies 5th Jul '16 2 of 6

Yes, but don't be taken in by the trading conspiracy that just looks at capital values.
This data sheet

shows that the FTSE 100TR has returned 32% over the last 5 years. Still less than the 57% of the 250 but those gains are now being eroded. Never under-estimate the importance of dividends over the long-term. And the 250 has given a rougher ride.

I can't quickly access a longer term graph of total returns for these two indices but I am sure they are available somewhere.

Fund Management: VT Smart Dividend UK Fund
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herbie47 5th Jul '16 3 of 6

Rob, thanks for that. Yes I do know about dividends thats why I hold some of the FT100 companies. So it looks like sell small/mid caps before recession which is possibly now and hold or buy large caps, then move into small/mid caps when things are recovering, the FT250 went up 50% in 2009. I note some large caps have fallen considerably in the last 10 days, builders are probably the worst sector but retail and finance has also been hit. I'm going towards that now have sold quite a few small caps and picked up a few large caps but have about 40% cash which is unusually high.

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Rob Davies 6th Jul '16 4 of 6

I don't see why there should be a recession after the boost from manufacturing from a 7% devaluation.

Fund Management: VT Smart Dividend UK Fund
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herbie47 6th Jul '16 5 of 6

In reply to post #141350

Imports are more than exports. Manufacturing is only a small part of the economy.

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Rob Davies 6th Jul '16 6 of 6

I know, that is part of the problem.

Fund Management: VT Smart Dividend UK Fund
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