UK small-caps outperform the FTSE All-Share in 2020

NSCI 2021 Annual Review, by LBS's Paul Marsh and Scott Evans shows small-caps outperform by 10.9%

Helen Rey Banner

2020 was one of the most volatile years in living memory for the UK equity market. From a low point of 40% down in March, the Numis Smaller Companies Index (NSCI) staged a remarkable recovery, achieving an all-time high on the 29th December. The index finished the year with a total return of 1.1%. Over the 66-year history of the index, the annualised return on the NSCI is now 14.6%, which is 3.4% greater than the annualised return on the large-cap oriented FTSE All-Share.

The NSCI 2021 Annual Review, by Paul Marsh and Scott Evans of London Business School, provides an in-depth analysis of the Numis indices which now span the entire UK market and which remain the definitive benchmark for monitoring the performance of smaller and mid-sized companies in the United Kingdom.

Performance highlights:

 ● The most widely used NSCI benchmark, the NSCI XIC, outperformed the FTSE All-Share by 5.5% in 2020.

● The “smaller-small” companies of the NSC 1000 XIC did even better, outperforming by 8.3%.

● The Numis Alternative Markets index (AIM stocks) had an excellent year, returning 19.3%.

● Mid- and large-cap companies did poorly. The Numis Mid Cap XIC fell by 9.9% and the Numis Large Cap by 10.3%.

● £1 invested in the NSCI in 1955 would have grown to £7,933 by end-2020, with dividends reinvested. The same investment in the minnows index, the NSC 1000, would have grown to £18,267, while a corresponding investment in the Numis Large Cap would have yielded just £1,054 (see chart below).


Other findings from this year’s analysis:

 ● Significant changes to dividend policy in 2020: The pandemic has led to severe dividend cuts, with small- and midcap companies worst hit. NSCI dividends experienced the largest one-year fall since the index began in 1955.

● Limited reaction to dividend cuts: An analysis of the stock price reaction to dividend announcements showed that companies are not being overly punished for cutting dividends – investors often see this as a prudent measure.

● Capital raising in 2020 was high: NSCI companies raised 95% more in 2020 compared with 2019, the largest amount in recent years. However, this was well below the amount raised in the global financial crisis.

● AIM stocks outperformed the FTSE All-Share by 29.2%: This success was broad-based across many industries. While large AIM stocks did well, the smallest AIM companies showed astonishing returns, punching well above their weight.

● A good year for investment companies: Listed investment companies performed strongly, with a 15% return. This arose from their large exposure to markets outside the UK.

● Factor premiums negative in 2020: Factor investing within the NSCI has historically generated useful premiums. However, last year was the first on record when all five factors monitored by Numis gave negative returns (value, size within small-caps, income, momentum and low volatility).


Scott Evans and Paul Marsh,authors of the report, said: “2020 was a year of surprises, the most striking of which was the Phoenix-like recovery of small-caps from the depths of the market last March. This demonstrates the resilience of the smaller companies sector, a repeated theme within the 66year history of the Numis indices”.

Will Wallis, Head of Research at Numis, said; “The 2021 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.”


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 66 years from 1955 to date. At the start of 2021, the NSCI contained 680 companies, the average market capitalisation of its constituents was £359 million, and the index’s largest constituent (Helios Towers) had a value of £1,500 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.