What a lot of visitors won’t realise when they visit the many leisure attractions across the UK and Europe is that the technology keeping them running is in many cases from the high-growth UK company Accesso (previously Lo-Q).
This company started life as a private ‘lifestyle’ business before listing on the London Aim market, where it received capital to expand.
From online ticketing right through to ‘virtual queuing’, which allows you and your family to reserve rides and queue for you throughout the day, this company is typical of the many successful small firms creating employment right here in the UK.
In its recent annual report on the ‘1000 Companies to Inspire Britain’, the London Stock Exchange noted that 731,000 jobs had been created in a single year by companies that had raised equity capital on Aim.
THE BACKBONE OF THE UK ECONOMY
These firms also paid £2.3 billion in tax and contributed £25 billion to UK GDP over the same period. UK smaller companies are often cited as being the backbone of the UK economy, and this is direct evidence that they are lending vital support to employment numbers.
In the report, George Osborne highlights ‘the UK’s pioneering, entrepreneurial spirit and our nation’s capacity to produce world-class innovation’.
Xavier Rolet, chief executive of the LSE, also points out the benefits of long-term finance using equity rather than debt, which allows ‘companies the time and freedom to innovate, invest, grow and create jobs’.
It’s one thing investing to satisfy a social conscience, but what about performance: are smaller companies a good place for your money?
For the answer to this, we will refer to the English finance academics Professors Elroy Dimson and Paul Marsh, who created the FTSE 100 and Numis Smaller Companies Index (NSCI).
In their recent 2015 NSCI Annual Review they compared the performance of a number of asset classes since 1955, one of the longest such studies ever produced; the results certainly make a strong case for including small caps when investors are looking to create their portfolios.
From the top down it’s no surprise to see the FTSE All-Share beat gilts over this period, with a whopping 821 per cent return versus just 23 per cent for the relative safety of fixed income.
However, it is the NSCI which steals the show with an increase of 4,946 per cent over the 60-year period. This equates to small caps outperforming large caps by 3.4 per cent every year.
Over more realistic holding periods the numbers still remain robust; in the six rolling 10-year cycles since 1955, smaller companies have outperformed larger ones in all but one period.
This has not just occurred in the UK either; it is the same in nearly every major country across the world except for those where state-controlled behemoths skew the numbers.
Indeed, Fama and French, another pair of respected financial academics, found that this ‘size’ issue was one of a number of distinct factors behind equity performance in general.
So what is it that gives smaller companies this extra boost?
Lack of research
Only the largest stocks get coverage by the analysts, which leaves a huge number of companies where the share price may not reflect the prospects of the underlying business.
Good fund managers are able to spot these and benefit from a future uplift or re-rating.
High growth opportunity
When a company is small, it has a lot of potential upside to increase the amount of business it does and the profits it produces. This same opportunity is not available to huge conglomerates.
Smaller firms are also able to capitalise on new ideas and changes in markets; again this is not easy for large firms where existing infrastructure is already in place.
Ownership
Some of the most solid firms are small caps and this may be purely down to the fact that a large majority of the shares are still owned by the original owners or their offspring; this brings with it a level of stewardship which means they are unlikely to over indebt the company or take too much risk.
Board level ownership is also a good sign in that the people who make the decisions have skin in the game.
Acquisitions
Finally, one of the quickest ways for a firm to increase its size or to gain entry to a new area or product is to buy a (usually smaller) firm. The process of buying out another business often involves a decent increase in the acquired firm’s share price.
For exposure to smaller companies there are many funds to choose from here in the UK, and as always it is worthwhile doing a little bit of research.
Passive funds have been popular with investors recently, but for small-cap versions these tend to have holdings which are more towards the mid-cap range of market capitalisation, i.e. in the FTSE 250 and with a market capitalisation of £500 million to £4 billion.
So, for genuine exposure to smaller companies, active funds tend to be better. These involve qualitative research by the fund managers themselves who visit the companies and meet the people of the firms they have invested in, unlike passive funds which normally select only using a computer algorithm.
SOURCE: www.moneyobserver.com
