A volatile year for UK small caps in 2018

18 Jan 2019


Smaller companies index provides total return for 2018 of -11%, despite earlier all-time high

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2018 was a volatile year for equity markets, the Numis Smaller Companies Index (NSCI) 2019 Annual Review has confirmed.

Despite hitting an all-time high during the year, the NSCI succumbed to the influences of global financial markets leading to an annual total return of −11.0%. This compares with a return of −9.5% for the FTSE All-Share index.

This was the worst year for UK equities and the NSCI since the financial crisis in 2008. Over the 64-year history of the index, the annualised return on the NSCI is now 14.7%, which is 3.3% greater than the annualised return on the large-cap oriented FTSE All-Share.

The annual review, by Paul Marsh and Scott Evans of London Business School, was created 32 years ago by Professors Marsh and Elroy Dimson and is the definitive benchmark for monitoring the performance of smaller and mid-sized companies in the UK.

The 2019 report details performance highlights that include:


  • The NSCI and NSCI XIC (ex-investment companies) produced total returns of −11.0% and −15.3% respectively over the year. This compares to −9.5% for the FTSE All-Share.
  • The very small companies of the Numis 1000 index returned −9.5% over the year, and −14.3% after excluding investment companies. The Numis Mid Cap index XIC returned −15.6%.
  • The Numis Alternative Markets index (AIM stocks) fell by 17.5%, mostly in the final quarter.
  • Small-cap returns, both in absolute terms and relative to large-caps, were negative in all but one (South Korea) of the world’s largest stock markets in 2018. Over the longer-term, however, small-cap premia remain positive in most markets.
  • A £1 investment in the NSCI made at its starting point in 1955 would have been worth £6,417 by the end of 2018, with dividends reinvested. The same investment in the minnows index, the Numis 1000, would have grown to £15,213, while a corresponding investment in the FTSE All-Share would have yielded just £991.

Other findings from this year’s analysis:


  • MiFID II is one of the most significant changes to date in regulation affecting the European financial services industry. One year after its implementation, the authors have looked at the trends in research coverage and liquidity of smaller companies. Research coverage of UK listed companies fell by 8% in 2018, but by equal amounts for both large- and small-caps. They find no evidence to suggest that MiFID II has impacted the liquidity of small-caps.
  • The authors have analysed the influence that foreign companies have had on the composition and performance of AIM. They find that overseas AIM stocks have underperformed their domestic counterparts by almost 4% per annum.
  • For the first time the report presents factor premia within AIM, showing that for AIM, like the main UK market, factors such as size, value, momentum, low risk and income are important and have generated positive premia. Perhaps ironically for a growth oriented market, value and low risk stocks were the better performers on AIM.
  • The authors also document that AIM has matured greatly over the last decade, and now has a much higher proportion of seasoned stocks, profitable companies and dividend payers.
  • In their analysis of IPOs, the authors find that companies listed in 2018 generated positive relative returns. This was the case for both fully listed companies and for AIM stocks.
  • Finally, the authors compared long-term real returns from equities, bonds, bills (cash) and house prices over the last 64 years. Equities have greatly outperformed bonds and bills. Within the equity market, it has been a case of “the smaller the better”. Finally, house prices rose in line with the return from long gilts. If rental income were included, the authors estimate that housing has provided a return between that on gilts and large-cap equities.

Professor Marsh and Evans said: “Our analysis of the longer-term trends of the NSCI combined with our work on current issues such as MiFID II provide many insights into what drives smaller companies returns. Two surprising findings this year are that MiFID has not (so far) adversely impacted small-caps; and that within AIM, a growth market, some of the better performing stocks have been value (rather than growth) oriented, and lower, rather than higher risk companies."

Will Wallis, Head of Research at Numis, said: “The 2019 Annual Review provides real insight into the history of the indices and the drivers behind the performance of smaller companies. It is an invaluable source of information for small-cap and large-cap investors alike.”

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