Key Highlights
31% decline in number of listed smaller companies in the past 20 years, net loss of nearly 600 companies.
Drop in demand from UK pension funds; only one Local Government Pension Scheme allocates to UK smaller companies, down from 18 in 2013.
UK smaller companies have delivered strong long-term returns, with higher volatility, significantly contributing to UK economy - creating jobs and wealth.
Annualised total return of 7.4% over 25 years, including AIM, matching the S&P 500 (7.5%) and nearly 50% higher than the broader UK market (5.4%).
Foreward from Sir Douglas Flint, Chairman at abrdn.
Smaller companies play a vital role in the UK economy by creating jobs, channelling investment into a wide range of sectors, pushing the boundaries of innovation and driving technological advancement.
From an investment perspective the UK listed ‘small caps’ sector also has an extremely positive story to tell with a strong track record of delivering long-term, risk-adjusted returns. Successful smaller companies can deliver multi-year growth and performance returns with the potential to become the larger companies of tomorrow.
However, what should be seen as a key component of a well-balanced portfolio has dropped out of fashion as major investors have turned towards ‘mega’ caps, which have the largest capitalisation or values, and familiar global brands. At the same time the number of listed smaller companies has steadily declined, as has the flow of Initial Public Offerings.
The reasons for this shift in investment direction are various but all have played a part to a greater or lesser degree.
- The closure of Defined Benefit pension schemes
- Structural risk aversion of the replacement Defined Contribution schemes
- Plentiful supply of private equity capital
- Trend towards more globalised portfolios
- 'Higher for longer' interest rate environment
Other cited factors include the costs and onerous obligations associated with heavy compliance, regulation, governance and audit requirements for smaller listed firms.
Overlooked opportunities
This means investors risk missing out on opportunity. The UK listed smaller companies’ sector offers attractive valuations and robust earnings which, coupled with the broader backdrop of a recovering economy, the prospect of further cuts in interest rates and a relatively stable political environment, makes for a compelling proposition.
It is therefore perplexing that what should be a jewel in the crown for UK capital markets has become largely overlooked by major investors.
abrdn recognises the value of investing in smaller companies and their economic and social importance, hence our enthusiasm for partnering with New Financial on this report along with the QCA, Winterflood and Euroclear.
Roadmap to sector revitalisation
This carefully considered report is a roadmap for revitalising this key sector. We would urge policymakers and regulators to consider the recommendations carefully and act to help the sector to achieve its full potential as an engine of economic growth and future global competitiveness.
Creating a UK smaller listed companies’ sector which is comparable in size and vibrancy to those which exist in other markets will help to create prosperity and opportunity to all parts of the UK – a clear and commendable ambition this new government has set itself and one we fully support.
In summary, if there is an optimal time to put the listed smaller companies’ sector under the spotlight, with a view to making it work better for the economy, investors and society at large, this must be it. Let’s grasp the opportunity.
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