The Analyst: The drama of mid-caps - they’ve beaten the big boys over 10 years

 

The fortunes of the UK’s largest 100 companies are well publicised. You may note the FTSE 100 always tends to be the quoted index in the financial press and thus investors could be excused for focusing their attention on these corporate behemoths. Yet it is not terribly representative of the UK economy. For starters, the top 20 stocks account for nearly 50 per cent of the entire index and are largely international businesses.

In my view, the UK’s next 250 largest companies provide a much-better guide to the fate of our economy. Interestingly, the FTSE 250 (excluding investment trusts) would have been a superior place to put your money over the last 10 years. Over this period, the index has returned more than double that of the FTSE 100, growing by 270.6 per cent and 114.8 per cent respectively.

There are several dedicated mid-cap funds which have capitalised on this trend. One up-and-coming manager I believe is worthy of a closer look is Chris St John who manages the AXA Framlington UK Mid Cap Fund. The retail version of this fund launched in April 2011 and performance has been admirable so far.

Mr St John has had the opportunity to work closely with Nigel Thomas, manager of the highly successful AXA Framlington UK Select Opportunities Fund. The two managers have a close working relationship, holding debates on those mid-cap stocks not held in the other’s portfolio. Both managers share a similar philosophy, focusing on dividend growth and free cash-flow yields, while also managing money with an absolute-return mentality, taking little notice of the positioning of any benchmark. They are also both keen to follow company management who have been successful in the past. Overall, they seek positive change, be it to a business, through management or within markets. The key difference between the two is the size of company they seek; Mr Thomas does not tend to invest in businesses less than £100m in size.

Mr St John’s approach is relatively risk averse, preferring to run what he describes as a “fairly diverse fund” with around 60 to 80 holdings, and currently owning 71. His investment horizon is typically three to five years. The fund holds a minimum of 70 per cent in FTSE 250-listed companies, which increases to 80 per cent when including stocks similar in size, but do not feature in the index. A maximum of  15 per cent of the portfolio can be invested in the FTSE 100, providing some scope for  Mr St John to run his winners as they progress from medium-sized to larger companies.

Mr St John’s investment process combines top-down and bottom-up analysis. He considers wider economic drivers; his current views incorporate themes such as technological change, UK survivorship, customer service and self-help management change. From a bottom-up perspective, Mr St John considers management track record, level of pricing power and high barriers to entry. He is also naturally valuation-aware, with price a key consideration.

There is no hiding the fact that medium-sized companies have outperformed their larger counterparts to a significant degree over the past five years by 126.8 per cent. Despite this, opportunities within mid-caps remain attractive. On average, companies in the FTSE 250 have higher earnings growth potential than most in the  top 100. The index also offers greater sector and geographical diversification. It is constantly refreshed with successful and growing smaller companies, while also being a greater beneficiary of merger and acquisition activity. Ironically, there is also declining analyst coverage in this area, which provides more opportunity to uncover anomalies not already recognised by the wider market.

Mr St John has a very credible track record and he is certainly on my list of up-and-coming fund managers to watch. The fund remains nimble at around £50m – an ideal size in my view, providing flexibility to invest in opportunities not available to other well-established funds. At the same time, he has the added advantage of drawing on the tremendous experience of the UK team at AXA Framlington, headed up by George Luckraft and Nigel Thomas.

Mark Dampier is head of research at Hargreaves Lansdown, the asset  manager, financial advisor and stockbroker. For more details about the funds included in this column, visit hl.co.uk/independent

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

News
people
News
Ed Miliband received a warm welcome in Chester
election 2015
Life and Style
Apple CEO Tim Cook announces the Apple Watch during an Apple special even
fashionIs the iWatch for you? Well, it depends if you want for the fitness tech, or the style
News
Astronauts could be kept asleep for days or even weeks
scienceScientists are looking for a way to keep astronauts in a sleeplike state for days or weeks
Finacial products from our partners
Property search
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE £45,000: SThree: SThree Group have been well e...

    Ashdown Group: IT Manager / Development Manager - NW London - £58k + 15% bonus

    £50000 - £667000 per annum + excellent benefits : Ashdown Group: IT Manager / ...

    Recruitment Genius: Sales Consultant / Telemarketer - OTE £20,000

    £13000 - £20000 per annum: Recruitment Genius: Scotland's leading life insuran...

    Ashdown Group: Training Programme Manager - City, London

    £40000 - £45000 per annum + benefits : Ashdown Group: Training Programme Manag...

    Day In a Page

    NHS struggling to monitor the safety and efficacy of its services outsourced to private providers

    Who's monitoring the outsourced NHS services?

    A report finds that private firms are not being properly assessed for their quality of care
    Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

    Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

    The Tory MP said he did not want to stand again unless his party's manifesto ruled out a third runway. But he's doing so. Watch this space
    How do Greek voters feel about Syriza's backtracking on its anti-austerity pledge?

    How do Greeks feel about Syriza?

    Five voters from different backgrounds tell us what they expect from Syriza's charismatic leader Alexis Tsipras
    From Iraq to Libya and Syria: The wars that come back to haunt us

    The wars that come back to haunt us

    David Cameron should not escape blame for his role in conflicts that are still raging, argues Patrick Cockburn
    Sam Baker and Lauren Laverne: Too busy to surf? Head to The Pool

    Too busy to surf? Head to The Pool

    A new website is trying to declutter the internet to help busy women. Holly Williams meets the founders
    Heston Blumenthal to cook up a spice odyssey for British astronaut manning the International Space Station

    UK's Major Tum to blast off on a spice odyssey

    Nothing but the best for British astronaut as chef Heston Blumenthal cooks up his rations
    John Harrison's 'longitude' clock sets new record - 300 years on

    ‘Longitude’ clock sets new record - 300 years on

    Greenwich horologists celebrate as it keeps to within a second of real time over a 100-day test
    Fears in the US of being outgunned in the vital propaganda wars by Russia, China - and even Isis - have prompted a rethink on overseas broadcasters

    Let the propaganda wars begin - again

    'Accurate, objective, comprehensive': that was Voice of America's creed, but now its masters want it to promote US policy, reports Rupert Cornwell
    Why Japan's incredible long-distance runners will never win the London Marathon

    Japan's incredible long-distance runners

    Every year, Japanese long-distance runners post some of the world's fastest times – yet, come next weekend, not a single elite competitor from the country will be at the London Marathon
    Why does Tom Drury remain the greatest writer you've never heard of?

    Tom Drury: The quiet American

    His debut was considered one of the finest novels of the past 50 years, and he is every bit the equal of his contemporaries, Jonathan Franzen, Dave Eggers and David Foster Wallace
    You should judge a person by how they peel a potato

    You should judge a person by how they peel a potato

    Dave Hax's domestic tips are reminiscent of George Orwell's tea routine. The world might need revolution, but we like to sweat the small stuff, says DJ Taylor
    Beige is back: The drab car colours of the 1970s are proving popular again

    Beige to the future

    Flares and flounce are back on catwalks but a revival in ’70s car paintjobs was a stack-heeled step too far – until now
    Bill Granger recipes: Our chef's dishes highlight the delicate essence of fresh cheeses

    Bill Granger cooks with fresh cheeses

    More delicate on the palate, milder, fresh cheeses can also be kinder to the waistline
    Aston Villa vs Liverpool: 'This FA Cup run has been wonderful,' says veteran Shay Given

    Shay Given: 'This FA Cup run has been wonderful'

    The Villa keeper has been overlooked for a long time and has unhappy memories of the national stadium – but he is savouring his chance to play at Wembley
    Timeless drama of Championship race in league of its own - Michael Calvin

    Michael Calvin's Last Word

    Timeless drama of Championship race in league of its own