Here’s how various indices have performed over the last decade:
- ASX: +65% – FTSE All-share
- MCX: +188% – FTSE 250
- T1X: +2% – techMARK Focus
- UKX: +52% – FTSE 100
This is rather interesting. The mid-cap index (MCX) has stormed the charts, producing well over double for the All-Share index and Footsie. Yet the techMARK Focus, comprising of tiddlers, and presumably growth companies, has hardly budged. You would expect these shares to be rocket-propelled.
Over the last year, MCX has returned 19%, whilst the Footsie has only produced 6%. So it may be that if you had handily beaten the Footsie over the last year, it could simply have been due to the universe you were selecting from.
In a previous post, I calculated that most classes of sizes of companies were of about the same valuation, implying that none should be preferred. However, I have reason to reconsider.
In Peter Lynch’s book, Beating the Street, page 66, Lynch displayed an interesting graph plotting the PE of the T Rowe Price New Horizons (Horizons) fund against the PE of the S&P 500. Horizons is a small cap growth fund. When the RPE (Relative PE: Horizons PE to the S&P 500 PE) is below 1.2, you should consider small cap growth “screaming buys”If it goes above 2.0, then you should consider small cap growth vastly overpriced.
Where are we in this equation?
Instead of looking at the Horizons fund, I instead used a proxy: Artemis UK Smaller Companies, which concentrates on small-cap growth. I looked at their top 10 holdings (because that’;s the only ones that were shown), and eliminated two on the list because i couldn’t find listings for them. I was therefore left with 8 companies, with the following PEs: MER 12.3, BRK 19.9, HAT 8.5, TRS 17.8, DNO 15.7, FOUR 15.5, DPH 16.7, ERM 12.1. That averages out at 14.8. Since the market average is about 13.4, that gives a ratio of 1.1.
Since 1.1 is less than 1.2, this suggests that small-cap growth is a very good area for investment right now.
