Smaller companies outpace blue chips
Thursday 12 August 1993
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.
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