Smaller companies outpace blue chips
Since the current bull market got under way last September, the FTA All Share index has risen 34 per cent. But investing solely in pharmaceutical shares would have resulted in a 21 per cent fall over the period. Concentrating on property companies or builders, however, would have more than doubled the original investment.
Equally, as the chart shows, buying a spread of small company shares has proven to be a much better investment than focusing on blue chips in the FT-SE 100 or the medium-sized players in the FT-SE 250.
The new FTA Small Cap index, which consists of the smallest companies in the All Share Index, has handsomely outperformed the rest of the market. Medium-sized companies have left bigger ones behind.
Sushil Wadhwani, equity strategist at Goldman Sachs, points to two main reasons for the performance of small companies. 'Valuations of small companies reached historically low levels last September, in anticipation of a low-growth environment within the ERM. That meant that they had further to bounce once the currency strait-jacket was removed,' he said.
Smaller companies are also more exposed to the domestic economy than the large international groups in the FT-SE 100. Increased demand, stimulated by lower interest rates, gave them a bigger boost. The cheaper cost of borrowing money also helped heavily borrowed tiddlers.
John Reynolds of NatWest Markets agrees that relative performance has been influenced by size but thinks the effect is really only a by-product of differing performances between sectors.
'It is no surprise that the FT-SE 100 index has underperformed the smaller indices when it includes all the major pharmaceuticals companies. Conversely, the capital goods sector, which represents 30 per cent of the Small Cap index but only 8 per cent of Footsie, has grown almost twice as fast as the market.'
At the other end, out-of-favour defensive stocks such as the privatised electricity and water utilities are heavily represented in the FT-SE 100.
Most analysts expect recent trends in sector performance to continue, although only limited overall growth in the FT-SE 100 is expected this year.
- 1 Frank Lampard's face drops when Holly Willoughby introduces him as a 'Man City legend'
- 2 'Do not give them a reason': Baltimore man divides police and rioters in hope of avoiding violence
- 3 X Factor in crisis as numbers of people auditioning plummets
- 4 Baltimore riots: Furious mother marches her son home live on TV
- 5 General Election 2015: Stephen Hawking says he will vote Labour
General Election 2015: Tories suspend candidate who said she would never support 'the Jew' Ed Miliband
Bali Nine executions: Indonesia confirms killings of Andrew Chan and Myuran Sukumaran will go ahead
The four utterly contradictory polls that tell the story of this election and why it is pointless trying to predict the outcome
General Election 2015: Prospect of Labour-SNP coalition makes one in four voters less likely to support Ed Miliband, says survey
Baltimore riots: Furious mother marches her son home live on TV
General Election 2015: Chuka Umunna on the benefits of immigration, humility – and his leader Ed Miliband
The sickening truth about food banks that the Tories don't want you to know
Aaron and Melissa Klein: Oregon anti-gay bakers ordered to pay $135,000 after refusing to make cake for same-sex wedding
Andrew Lloyd Webber: Phantom of the Opera writer mocked after issuing a warning about Ed Miliband and Nicola Sturgeon
EU exit would hit UK economy much harder than neighbouring countries, study finds
General election 2015: Labour will toughen hate crimes legislation surrounding Islamophobia
iJobs Money & Business
£Basic (OTE) + Uncapped Commission: Guru Careers: A Stockbroker (qualified / p...
£20000 - £60000 per annum: Recruitment Genius: Are you recently QCA Level 4 qu...
£20000 - £22500 per annum + OTE £30K: SThree: SThree Group have been well esta...
£25 - 30k: Guru Careers: We are seeking an Application Support Analyst / 1st L...