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Size matters worst year for UK smaller companies since 1974

15 Jan 2009

The Hoare Govett Smaller Companies (HGSC) Index report, published by The Royal Bank of Scotland (RBS) and London Business School

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The Hoare Govett Smaller Companies (HGSC) Index report, published today by The Royal Bank of Scotland (RBS) and London Business School professors Elroy Dimson and Paul Marsh, shows that in 2008 small-caps suffered one of the worst years on record.

The HGSC Index measures the performance of the lowest tenth by value of the main UK equity market. Launched in 1987, the index has a unique 54-year back-history. In 2008, the HGSC gave a total return of -39.6%, which is 9.6 percentage points worse than the FTSE All-Share. The smaller the company, the worse its 2008 performance tended to be, and the HG1000 "minnows" index (ex-investment companies) underperformed the FTSE All-Share by -16.7%. AIM stocks did even worse.

Richard Rae, Head of UK Mid/Small Cap Equities at RBS, said: "While small-cap valuations are at historic lows, the heavier dependence on the vulnerable UK economy means risks to profits and dividends are high. As a result we don't expect an early return of confidence, but for long term investors, this dynamic segment of the market continues to offer attractions. As ever, stock selection is critical in the current climate".

From a high in 2007 the HGSC is now down 48.4 percent compared to 32.5 percent for the All-Share. However it's not all bad news.

The authors of the report, Professors Elroy Dimson and Paul Marsh, said: "Last year, the HGSC had its second-worst year on record. Out of 648 months since 1955, the return during October 2008 was the second-worst, and September 2008 was the seventh-worst. But even though 2008 was dire, the long-run outperformance of small-cap value strategies is remarkable."