Are European companies good investments?
I’m a big horse racing fan and I always remember a horse called Sizing Europe, which was always...
Believe it or not, it’s been almost three years since the British people voted to leave the European Union.
While all eyes have been on the UK’s largest companies and the fate of the FTSE 100, UK smaller companies have been resilient in the face of adversity.
Not only have UK smaller companies funds performed better than their larger counterparts, they have also outperformed their European peers*.
The average fund in the IA UK Smaller Companies sector has returned 47.92%* over the period, outperforming all other UK and Europe ex-UK equity peers, as well as the index (FTSE Small Cap ex IT) which rose just 26.25%*. This highlights the benefits of active management in this asset class.
The second best-performing sector was IA Europe ex UK, which returned 38.36%*, followed by IA European Smaller Companies, which returned 37.32%*. The average IA UK All Companies fund, in contrast, returned 32.08%* while the IA UK Equity Income sector average performance was 25.08%*.
Here we highlight the top five UK and European Elite Rated and Radar funds since the referendum*.
|1||MI Chelverton UK Equity Growth||79.43%|
|2||Liontrust UK Micro Cap||66.68%|
|3||Marlborough UK Micro Cap Growth||66.63%|
|4||Liontrust UK Smaller Companies||66.29%|
|5||LF Gresham House UK Micro Cap||58.09%|
|2||Marlborough European Multi-Cap||53.58%|
|3||Baring Europe Select||50.59%|
|4||BlackRock European Dynamic||49.09%|
|5||T. Rowe Price European Smaller Companies Equity||46.42%|
According to Montanaro Asset Management, the smaller companies specialist, there are three good reasons to invest in smaller companies today.
“The first is currency,” said Ed Heaven, “Over the past 5 years, sterling has fallen by a staggering 23% versus the US dollar. Much of this occurred in the immediate aftermath of the Brexit referendum when the pound slumped to a 31-year low. What UK exposure investors had was swiftly tilted towards the beneficiaries of a weaker pound: larger businesses who source so much of their earnings from overseas. As and when this reverses, investors may decide to return to smaller companies.
“The second is valuation. Despite the consensus being that earnings expectations of UK smaller companies are significantly higher than their larger counterparts, small-caps are trading at a 5% discount to large caps and 20% discount to European smaller companies. Another indication of the relative value of UK equities is demonstrated by the inverse relationship between yield and price: UK equities now yield 3.5% more than UK government bonds – a level not seen since the reign of Queen Victoria.
“This brings us to our third and final point: returns. We have calculated future returns based on three components which we assume mean-revert over time. The results of this are striking and suggest that, over the next seven years, UK Smaller Companies offer the strongest per annum return of 10.1% – a higher level than we have seen over the past half-century.”
*Source: FE Analytics, total returns in sterling, 24 June 2016 to 11 June 2019.