I am often asked when speaking at investment seminars why, over the years, we at Equi have remained so committed to smaller companies, particularly given the sector’s volatility. Our UK exposure naturally includes companies of all sizes, but we are overweight the smaller end of the spectrum even when our investment trust portfolios are seeking both yield and diversification.
A key reason is well acknowledged – smaller companies’ superior performance over the long term, as reflected in their stock market returns when compared with their larger brethren. Elephants tend not to gallop. But a further reason is less well acknowledged and perhaps more contentious – our big companies have a poor track record at commercialising innovation and scaling up when compared with many of their international rivals. This is not helped by an ingrained financial system too focused on short-term returns and targets.
And this has contributed to their underperformance. The stock market is a good measure of worth over time. It is worth asking why the FTSE 100 index, consisting of our top 100 quoted companies, has not made any progress in capital terms since the end of the previous century. This is in stark contrast to other major international indices – for example, the US S&P index has returned nearly 80 per cent over the same period. The answer perhaps reveals a malaise at the heart of our economy. And the worst may still be yet to come.