Make the most of small-cap stocks
Benefit from a wide scope of small-cap investing expertise, including a dedicated small-cap investment committee and specialist investment analysts. As one of the most experienced independent UK wealth managers in this area, we can help you feel confident your risk balance is right.
Our small-cap investment experts are constantly monitoring smaller companies. We look for those becoming pioneers in their area, at the forefront of innovation, playing a vital role in the growth of an emerging sector, or those simply doing something better or faster.
How we can help
Investing in small caps can deliver superior returns and growth as part of a well-balanced portfolio. But they come with a higher risk, which is why having your own specialist can make all the difference.
Small-cap portfolio service (equity-only)
Our standalone Small-Cap Portfolio Service invests in equities only and is therefore a high-risk portfolio. This is only suited to certain types of investors who are willing and able to take higher risk and more volatility in exchange for potentially higher growth
Discretionary portfolio management
Usually, exposure to small-cap stocks can be included as part of a diversified portfolio if we agree together that it’s appropriate for your personal situation, alongside large caps and other asset classes.
How we choose small-cap companies to invest in
To make the best and most balanced decision for you, our specialist small-cap investment committee carries out extensive research and analysis. They then create a shortlist of smaller companies that meet our criteria. We look for businesses with:
- High-quality management
- History of consistent growth in earnings
- Dividend growth
- Balance sheet strength
- Proven cash generation
- High barriers to entry
- Reasonable valuation
- Owner-managers.
Common questions on small-cap investing
Small-cap investing means buying shares in smaller companies, with the objective of seeing them grow and generate a return on your investment. It’s often called growth investing, as the value of the company will hopefully grow for the duration you invest in it.
Smaller companies aren’t micro businesses like your local coffee shop. Smaller companies can be well-established market leaders and household names, expanding businesses, or those carving out a niche in certain markets.
By smaller companies, we mean those that are:
- Listed on the Alternative Investment Market (AIM) - these companies can have a market capitalisation above £2bn
or
- Have a market capitalisation of less than £2bn and not within the FTSE 100 – this includes companies within the FTSE 250, FTSE Small cap and FTSE Fledgling Indices.
Small-cap investments can deliver superior returns and growth compared to larger companies. Historically small-cap stocks have outperformed large-cap stocks, but they’re a more volatile investment and come with a higher risk. That’s why it’s important to have a small-cap investment specialist by your side.
The benefits of small-cap investing include:
- Growth: Smaller companies can often grow quicker than large companies
- Initial Public Offerings (IPOs): If a small company is privately owned but is then listed on a stock exchange, this is an opportunity for investors to increase the value of their holding
- Mergers & acquisitions: Smaller companies are a more accessible size, so there tend to be more takeovers within the small-cap community, which can be advantageous for investors
- Strong positions in niche markets: Smaller companies can sometimes satisfy a very specific market need which means they potentially face less competition
- Ability to efficiently roll out business plans: These are smaller companies that have a proven and successful offering and are in the process of rolling out their product to new markets either in phases or store-by-store
- More tech in UK small caps: There’s a significant lack of tech stocks in UK large caps, despite tech being central to growth investing in recent years.
Whether it’s better to invest in small caps or large caps will depend on your personal situation and your risk appetite. It’s about achieving the balance that’s right for you.
Investing in small-cap stocks is usually riskier because smaller companies tend to be:
- More at risk of going bust than larger companies
- More volatile - their growth can be far more rapid than their larger counterparts, but so can their decline
- Less liquid than larger companies - they have access to less cash as they tend to invest their capital in future growth
- Less well-known, so investors need to do a bit more groundwork to understand what they’re investing in.
How much you invest in small caps depends on your situation and should be proportionate to your risk appetite: the level of risk you can afford to take.
If you’re in or approaching retirement, you’re more likely to have a lower risk tolerance and be an income investor (investors who make money from dividend payouts from the companies they invest in).
If you’re younger and likely to be investing in the markets for a long time, or if you have a large amount of investable capital, then you probably have a higher risk tolerance and are more likely to be a growth investor (buying shares at a certain value and trying to sell them for more).
When economies emerge from recession or a period of slow growth and start to grow again, this can be a good time to consider investing in smaller companies as it tends to be a time for fairly rapid growth. This means growth investors may see returns on their original investments more quickly than they might at other times of the economic cycle.
Risk warning
Investments in smaller companies, including AIM stocks, carry a higher degree of risk than investing in more liquid shares of larger companies, so they may be difficult to sell at the time you choose. Investments in smaller companies are more volatile and, while they can offer great potential, growth is not guaranteed.
