Overlooked opportunities in mid-caps
I’m sure most people have heard of middle child syndrome – some have no doubt experienced it...
The FTSE 100 will have a reshuffle over the weekend, as its quarterly review sees Renishaw relegated from the UK’s list of 100 largest companies and ITV step up.
Renishaw’s founders are trying to sell their combined 53% holding, but the precision engineering firm hasn’t been able to find a new owner and its share price has fallen. It returns to the FTSE 250 on Monday after just three months away.
ITV on the other hand joins newly promoted Royal Mail in the top flight (the postal company joined the FTSE 100 last month when RSA Insurance Group was deleted*). ITV was hit hard when the pandemic caused production problems and advertising budgets were slashed. Marketing spend is now ramping up once again and filming schedules are back on track.
Moonpig.com – a recent investment for Murray Income Trust – is among four companies rising into the FTSE 250. The company has done well during the pandemic as demand for cards and personalised gifts ordered online has grown substantially and, by using data to predict consumer preferences, it has managed to position itself as an e-commerce player rather than just an online card retailer.
Trust Pilot, Auction Technology Group and Spire Health Group also enter the mid-cap index, while Foresight Solar Fund, JLEN Environmental Assets Group, Provident Financial and Sabre Insurance Group fall out.
When companies move between indices in this way, they can experience technical buying or selling as a result of tracker funds adjusting their stock weightings. The impact of this is more acute when a stock comes into the FTSE All Share for the first time, as often this will result in net buying from tracker funds.
Chris St John, manager of AXA Framlington UK Mid Cap fund, commented: “Our fund has been structured so that it can hold up to 15% in FTSE 100 companies, in order to minimise the risk of becoming a forced seller at the point that a holding is promoted, without compromising the mandate of being a core UK mid-cap fund.
“In the June index changes, recent IPOs held in the fund (Moonpig and Auction Technology Group) will enter the FTSE All Share for the first time. The only FTSE 250 company scheduled to move to the FTSE 100, ITV group, is not a holding.
“From a fund management perspective, although the FTSE 100 holdings can be held indefinitely, they are typically used as a source of capital when a more exciting opportunity presents itself. Promotion to the FTSE 100 is a sign of success to some degree and we look forward to many more of our holdings following this path over next years.”
Although the FTSE 100 is a prestigious list and passive funds tracking the index tend to be cheaper than active funds, the average actively managed UK equity fund has significantly outperformed (after charges have been deducted) over multiple time periods, as the table below shows**.
|Percentage returns over 1 year**||Percentage returns over 3 years**||Percentage returns over 5 years**||Percentage returns over 10 years**|
|IA UK All Companies sector average||31.86%||11.21%||53.05%||106.98%|
The outlook for UK equities is also improving. Not only is the UK ahead in terms of the vaccine roll-out, but Brexit is now concluded and valuations for UK firms are still cheap vs peers listed in other countries.
Global investors have also started returning to the asset class, having been underweight UK equities for the past seven years, and a number of multi-asset funds have a bias towards to home market. TB Wise Multi-Asset Growth, BMO MM Navigator Distribution, Close Managed Income and VT Momentum Diversified Income, all have 20%^ or more invested in UK equities, for example.
For those wanting to invest in UK equities there are a number of alternatives for all types of investors.
For the more discerning investor, ASI UK Ethical Equity is an option. The company invites investor opinion annually into what categories they want the fund to include or exclude in the portfolio.
Those looking for an income, could consider LF Montanaro UK Income fund, where each holding will offer an attractive dividend yield or the potential for dividend growth, while growth investors may prefer Marlborough Multi-Cap Growth fund, which principally invests in sector leaders that can grow regardless of the prevailing economic landscape.
The more cautious investor may like to consider Threadneedle UK Extended Alpha, which can make money from falling share prices as well as rising ones, while investors willing to take on more risk may like a fund such as Liontrust UK Smaller Companies.
*In the event of corporate actions such as mergers and acquisitions, the highest-ranking company not currently included within the applicable index serves as the replacement.
**Source: FE fundinfo, total returns in sterling to 15 June 2021
^Source: fund fact sheets, 31 May 2021 and 30 April 2021