- Higher returns from Small Caps will be crucial to long term investors of all sizes, as lower yields scupper the mainstream market’s role as the engine room of returns
- Investment in both public and private Small Caps will be essential and enabled by the proliferation of new platforms that provide broader access
- Report includes interviews with 50 Small Cap CEOs revealing the growth opportunities in their markets and their requirements from the Brexit process.
London, Wednesday 17th May – All Street Research – the independent research firm focused on SMEs (www.allstreet.org) – today publishes a major new report highlighting what is happening in the small cap investment sector and revealing the pivotal role it will play for long term investors of all sizes. Interviewing 50 company leaders across private, crowdfunded and listed small caps, All Street’s report identifies the drivers and trends affecting small cap companies, and highlighting what they want to see from the Brexit negotiations. The report is available for download at www.allstreet.org.
Small companies are the backbone of the UK economy. 99.9% of all UK businesses are SMEs. Total employment in SMEs is 15.7 million, accounting for 60% of all private sector employment. As the UK proceeds through Brexit and beyond, never has it been more important that the needs of this segment be heard.
All Street Research Founder and CEO Emanuela Vartolomei commented, “It is increasingly clear that a large proportion of today’s excess investment returns have been captured by a tiny elite group of small company investors. The opportunities for institutional investors, and more importantly the UK’s retail wealth holders who entrust them with their money, are significant if they can properly get into this space. At All Street we are committed to helping investors navigate this segment, and at the same time to highlight the needs of UK small companies as Brexit becomes a reality.”
All Street’s report presents five key findings:
- First and foremost, long term investing in small companies is vital for delivering investment returns in a low yield environment. The days of chasing short term trading gains in mainstream markets are numbered. Small Caps have a long history of outperforming mainstream markets. The Numis Small Companies Index (NSCI) has, since 1955, beaten the FTSE All-Share index by an annualised rate of 3.4% p.a. and their very small companies index has outperformed by an even larger margin.
- In order to truly embrace small cap investing, investors must allocate across both public and private markets. According to All Street, even if only UK companies which have 5 or more employees are counted, there are nearly 486,000. Of these, only 2,000 UK incorporated companies are listed on a UK based stock exchange. New platforms such as crowdfunding and P2P, and the emergence of private secondary markets will increasingly blur the distinction between private and public. According to All Street’s Investment Mega Trends: “we are heading towards a world in which any type of investor will be able to access any type of investment through any platform.”
- It is going to be harder to find information about small caps because new regulations under MiFID II require financial intermediaries to unbundle research costs from dealing commissions. Some small companies face the risk of having less capital allocated to them as a result. But, it also means that there will be better investing opportunities for those who are willing to go through the time and expense of identifying the winners. To get there, asset managers may have to change their business model. As All Street states: “The provision of small cap research is becoming increasingly less sustainable in financial services firms.”
- On the recommendations for the Brexit negotiations, All Street gave a voice to small company leaders, and they gave a very clear response: “Please get on with it, we don’t like uncertainty”. 13 out of the 50 business leaders said that they want certainty as soon as possible. Regulatory certainty and free movement of labour were also high on the agenda.
- The small cap segment is a vibrant universe, with a wide diversity of business models from which firms have the potential to generate long term economic value. All Street identified technology innovation as the most common source of economic value, and it was a core component of the business in 14 out of 50 companies.
Emanuela Vartolomei concluded, “This report signals the moment when Small Caps should be recognized more widely and universally as pivotal to both future UK economic growth and the public’s long term financial security. Whether you are a DIY retail investor or major institutional asset manager the picture is the same – if you are looking for long term growth, the days of relying only on the mainstream markets are over.”
“The report is also a wake-up call for policymakers at the heart of Brexit negotiations. The factors affecting Small Caps are equally if not more important than those impacting FTSE100 companies and should be understood and safeguarded accordingly.”