Small is bountiful
This year promises to put small firms under the spotlight like never before. The world’s economies turn to smaller companies for momentum.
And, in election year in the UK, the performance of the economy is being looked at from every angle. Research suggests that 68 per cent of UK jobs are created by high growth small firms.
Given the forces at work, the publication of the Numis Smaller Companies Index (NSCI) Annual Review 2015 couldn’t be more timely. The authors of the Review are London Business School Professors Elroy Dimson and Paul Marsh. “The start of 2015 marks the diamond jubilee of the NSCI, since the index back-history starts in 1955. Over the last 60 years, UK smaller companies have delivered truly astonishing returns to investors,” says Dimson and Marsh.
The NSCI covers the bottom tenth by value of the main UK equity market. It is unique in having been calculated on a consistent basis over such a long period. At the start of 2015, the NSCI contained 714 companies, the average market capitalisation of its constituents was £318 million, and the index’s largest constituent had a value of £1,266 million.
“With a history that goes back 60 years, since the first published index value, the NSCI provides a unique opportunity to examine current issues and trends in a truly long-term context. The NSCI is the definitive benchmark for monitoring UK small- and mid-cap companies,” says Oliver Hemsley, Chief Executive of Numis.
The last year, reveal Professors Dimson and Marsh, wasn’t exactly a vintage one for companies of any size. The NSCI ended 2014 with a small positive return (0.8 per cent), almost exactly the same as the return on the FTSE 100 (0.7 per cent).
But Professors Dimson and Marsh offer a much more impressive longer term perspective. Their research reports strikingly high historical returns from UK smaller companies (represented by the NSCI) and even bigger returns from investing in minnows on the London Stock Exchange (as represented by the NSC 1000 index). Both Numis indices performed far better than the FTSE All-Share.
Since 1955, the index has achieved a 15.3 per cent compound return, 3.4 per cent per annum above the FTSE All-Share. Launched at 1000 in 1987, the returns index reached an all-time high on 6 March 2014 of 16910.
Dimson and Marsh also shed interesting light on initial public offerings (IPOs). In an analysis of 3507 IPOs, they show that the long-term average first day return of +8 per cent is offset by disappointing relative performance over the subsequent two years. But, since 1980, seasoned small-cap firms performed well. The return on stocks floated more than 20 years ago was high. Stocks floated between eight and 20 years ago were next. Floats from four to seven or from less than four years ago were worst.
The clincher for all those who champion small firms and their value to the economy is that the NSCI shows that during the period of 2000 to 2014, smaller companies outperformed larger ones in 85 per cent of worldwide markets. Small is bountiful.
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