When I sat down to write my review of 2016 I had to admit that it had been a tough year for smaller company fund managers as the sector’s median fund had underperformed the Numis Smaller Companies Index (NSCI) by 2.7%.
With a month to go in 2017, the median fund has returned 23.9% year to date, against the NSCI at 15.5% – a whopping 7.4% of outperformance. It is pleasing to note that this result is in keeping with the recent trend for smallcap funds to outperform, the median fund having returned 18.0% p.a. for the five years to November compared to 14.6% for the NSCI. (All of these figures are quoted after fees.)
For some of the reasons why active management seems to work in the smallcap sector, see my earlier blog here.
Leaving aside the endeavours of fund managers, it has been a good year for UK smaller companies in general. As mentioned above, the NSCI has returned 15.5% year-to-date, comparing very favourably with the FTSE All Share at 7.9% and even the MSCI All Countries World Index at 11.9%. However, the star of the show this year has been AIM, having returned 19.9% to the end of November. As I wrote earlier in the year this performance has had a number of drivers, but I would highlight the new breed of UK technology (and tech-enabled) superstars – the likes of Blue Prism, Boohoo and IQE.
Back on the main market, the list of winners is very different from last year, when it was dominated by resources stocks. This time round the top performer (so far at least) is Games Workshop, which has returned 186% to date. In case you haven’t heard of it before, Games Workshop is the global leader in the design, manufacture and distribution of fantasy war models.
Joining them in the 100% club 1 are software businesses Microgen (149%) and Sophos (101%), biomedical sciences firm Oxford Biomedica (118%) and media company Huntsworth (113%).
At the other end of the table there is arguably more of a theme with two UK support services and construction businesses propping up the table – Interserve (-82%) and Carillion (-94%). Along with HSS Hire (-64%) one might conclude that this is telling us something about the UK economy, but it may be more related to the state of these companies’ balance sheets.
Another pleasing feature of 2017 has been the robust IPO market. According to the London Stock Exchange, there were 71 IPOs on the London market up to the end of the third quarter, compared to 67 in the whole of 2016 and 92 in 2015. Inevitably there have been winners and losers 2 – star performer Alpha FX has returned 164% since its IPO in April, while Global Ports is down 39% since a May float. I am led to understand that there are more IPOs to come in the new year.
All-in-all then it has been a good year for smaller companies and an even better one for smallcap fund managers. While there are clearly still some scary risks out there (I almost got to the end without referring to Brexit!) I remain cautiously optimistic about our end of the market. While not immune to macroeconomic risk, we do have some really excellent companies listed in London and I firmly believe that they will collectively keep generating wealth for their investors over the long term.
1. I have ignored companies with a market capitalisation below £25m for simplicity
2. I have looked at companies with a market capitalisation above £50m that listed on the UK main market or AIM during 2017.