It’s been a difficult few months for the smallest of the small-cap companies listed on the UK market, according to an influential study of the sector.
Last year the UK fund industry was rocked by the controversy surrounding one of its superstar managers.
Neil Woodford’s flagship equity income fund was promoted by Hargreaves Lansdown and favoured by advisors based on his performance in his previous role at Invesco.
Large stakes in small-cap companies ultimately led to the suspension of the fund when redemption requests couldn’t be met.
Numis Index
The annual Numis Smaller Companies Index has discovered that the fall-out from the crisis has led to an overall ‘repricing of illiquidity’.
A collapse in investor confidence in the so-called ‘minnows’, the smallest listed companies, is reflected in their prices.
A ‘minnow’ company is defined by Numis as one in the lowest 2 per cent in terms of overall UK stock market valuation.
On the surface, it looks as if the ‘minnows’ had a decent 2019 with an annualised return of 15%, but small-cap companies overall, which is defined as the bottom ten per cent of the market, grew by 25%.
This is the largest gap between the two indices for five years.
Minnows
Historically, the ‘minnows’ have been a source of consistent returns, having outperformed the FTSE All-Share by 4.7% on average every year over the past 65 years.
These figures mask a high turnover of companies within the index with many going under to be replaced by start-ups, others going on to become larger companies.