Ok, so I am on vacation right now and should know better than to write posts for my substack.
But I have time to catch up with other people’s writing and saw Dewi John’s post on UK Small and Mid Cap Funds.
Dewi is a great writer and writes lots of interesting pieces on fund flows and fund performance, if you are into that kind of thing. You can follow him on LinkedIn or check out his posts on the webpage of LSEG.
In any case, today, he hit a soft spot of mine. I think if there are any areas where active fund management has a chance of generating alpha it is in less efficient markets and if you want to see a market that is incredibly inefficient at the moment, you don’t need to look any further than UK small- and mid-caps.
For a variety of reasons this part of the market has become heavily under researched and illiquid as institutional investors have moved into index trackers or reduced equity allocations altogether. And thanks in no small part to MiFID II, the research covering these stocks has diminished a lot, which means information doesn’t get incorporated into prices as quickly as it used to.
Or even worse, shares simply follow macro trends and ignore fundamentals for a while. Last year, my firm had to field webcasts for executives of UK smaller companies because they complained that they had brilliant operational results yet the share price didn’t move. It was all because for several months in 2023, the entire segment traded based on inflation expectations and central bank policy alone.
Fundamentals didn’t matter, until they did. In the last two months of 2023, UK small- and mid-caps rallied so much that they turned from large underperformers to significant outperformers vs UK large caps.
Check out Dewi’s piece on UK small- and mid-cap funds and some of the green shoots that are visible now. I, for one remain optimistic that UK small- and mid-cap has better performance ahead that what we have seen in the last couple of years: https://lipperalpha.refinitiv.com/2024/03/uk-small-caps-its-the-hope-that-kills-you/
They're as cheap as chips, as they say in Manchester