According to new research by London Business School’s Paul Marsh, Emeritus Professor of Finance, and Scott Evans, Researcher, 2019 was a good year for smaller and mid-sized companies. Their research presents an in-depth analysis of the Numis indices and of smaller UK companies. This year represents the 65th anniversary of the NSCI making it the longest running UK small-cap index and the definitive benchmark for monitoring the performance of smaller and mid-sized companies in the United Kingdom.
2019 was a good year for small- and mid-caps. The NSCI hit an all-time high on the 27th December and finished the year with a total return (including reinvested dividends) of 22.3%, or 25.2% after excluding investment trusts (XIC). Over the 65-year history of the index, the annualised return on the NSCI is now 14.8%, which is 3.3% greater than the annualised return on the large-cap oriented FTSE All-Share.
Performance highlights:
The most widely used NSCI benchmark, the NSCI XIC, outperformed the FTSE All-Share by 6% in 2019.
Mid-caps did exceptionally well. The Numis Mid Cap XIC returned 29.7%, 10.5%, ahead of the FTSE All-Share and 12.4% ahead of the FTSE 100.
The very small companies of the NSC 1000 index did less well and returned 15.9% (15.3% XIC).
The Numis Alternative Markets index (AIM stocks) gave a return of 14.7% in 2019.
Small-cap returns were positive in most of the world’s largest markets in 2019. Relative to large caps, small-cap premiums were positive in Germany, the UK, Canada, Spain and Switzerland. Over the longer-term, small-cap premiums have been positive in most markets.
A £1 investment in the NSCI XIC made at its starting point in 1955 would have been worth £8,688 by the end of 2019, with dividends reinvested. The same investment in the minnows index, the NSC 1000 XIC, would have grown to £21,516, while a corresponding investment in the FTSE All-Share would have yielded just £1,181 (see chart below).
Other findings from this year’s analysis:
Concentration of the UK equity market: A striking feature of the NSCI, and indeed the UK equity market as a whole, has been the marked decline over time in the number of listed companies, and hence index constituents. The UK equity market has concentrated into fewer, but on average, larger and more liquid companies.
Leisure best performing sector since 1955: The best performing sectors in the small-cap universe since 1955 were leisure, construction and business services, while the worst were oil, consumer durables and mining. To put these returns in perspective, £1 invested in 1955 in the small-cap leisure sector would today be worth £46,000 compared to just £26 if invested in small-cap mining.
Subdued acquisition activity in 2019: The report also documents acquisition activity over the last 65 years. Compared with the long-run picture, 2019 was a subdued year for corporate activity, with just 1.7% of NSCI index value being acquired. Despite the fact that bid premiums can be high, acquisitions on average add only 1.1% to index performance.
Domestic stocks outperform overseas stocks: The report shows while smaller companies are more domestically focused than large-caps, the margin is smaller than generally believed. In 2019, domestic stocks outperformed overseas oriented stocks by 10% within the NSCI and 11% in the overall UK market.
Momentum is best in 2019, value remains weak: Within the NSCI, 2019 was an excellent year for momentum investors and for those investing in low risk stocks. It was a poor year for value investing, a style which has underperformed now for more than a decade.
Size premium over the next 65 years: Historically, the NSCI has beaten the large-cap oriented FTSE All-Share by 3.3% per year. Prospectively, the authors argue that over the next 65 years, outperformance will be in the range 1-2% per year, with much year-to-year variability.
Scott Evans and Paul Marsh the authors of the report, said:
“Our analysis of the longer-term trends of the NSCI provide many insights into what drives smaller companies returns. It has been fascinating to see how the NSCI has changed since 1955”.
The chart below is from the 2020 NSCI Annual Review. It shows that UK equities, as measured by the FTSE All-Share, handsomely beat both gilts and treasury bills (cash) over the last 65 years. Small-caps, in turn, greatly outperformed the large-cap oriented FTSE All-Share. Within the Numis family of small-cap indices, it was a case of the “smaller-the-better”. The NSC 1000 minnows beat the NSCI small-caps, which in turn, beat the Numis Mid Cap.
The NSCI and comparative long-run returns
Notes to Editors
About the Numis Smaller Companies Index
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 the 65 years from 1955 to date. At the start of 2020, the NSCI contained 696 companies, the average market capitalisation of its constituents was £375 million, and the index’s largest constituent (Worldwide Healthcare Trust) had a value of £1,678 million.
The Numis index family also embraces versions that include AIM stocks, and that focus on minnows, mid-caps, or exclusively on AIM. All are available as both price and total returns indices, and both including and excluding investment companies.
About the Authors
Scott Evans is a researcher at London Business School. Previously he worked in investment banking for several financial institutions including UBS, Merrill Lynch, and ABN AMRO/RBS. He has also been a lecturer in economics at Oriel College, Oxford, a visiting lecturer at Birmingham and Brunel Universities and an Economist at the Institute for Fiscal Studies.
Paul Marsh is Emeritus Professor of Finance at London Business School and has previously served as Chairman of Aberforth Smaller Companies Trust and as a non−executive director of M&G Group and Majedie Investments. At London Business School he was previously Finance Chair, Deputy Principal, Faculty Dean and elected Governor.
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