While the UK’s smallest companies have a multi-decade record of outperforming larger peers, many investors remain cautious about moving down the market cap scale as they assume smaller automatically means higher risk.
The Liontrust UK Micro Cap Fund looks to capture the considerable opportunity in these businesses and by employing our tried and tested Economic Advantage process, we feel this can mitigate some of the additional risk. As on our Special Situations, UK Growth and UK Smaller Companies Funds, we are seeking stocks with hard-to-replicate intangible strengths and in our experience, the most difficult characteristics to reproduce are intellectual property, strong distribution channels and significant recurring business. The fund invests in businesses with a cap size of £150m and below.
Overall, we see three key reasons for a micro cap allocation in portfolios:
- Superior growth prospects: From 1955 to the end of 2015, the Numis 1000 index, comprising the smallest 2% of stocks on the UK main market by capitalisation, outperformed the FTSE All-Share by more than 14 times (Source: Numis).
- Access to entrepreneurial flair: High levels of equity ownership are more common among the smallest companies: this acts as a strong motivator and creates a more conservative business ethos.
- Opportunities in an inefficient market: Analyst coverage of micro cap stocks is increasingly thin, so it is fertile territory for those willing to undertake their own research in the hunt for pricing anomalies.