In today’s Exponential Investor:
- What is the FTSE SmallCap Index?
- Five SmallCap names that you may never have heard about
- Staying on track with the FTSE SmallCap
What is the FTSE SmallCap Index?
What sort of investor are you?
Do you have a proclivity for large, mainstream companies with a proven track record?
Or do you prefer smaller, fledgling companies that offer the lure of greater growth potential, but at a greater risk?
If it’s the latter, then the FTSE SmallCap Index could be a good place for you to start.
The FTSE SmallCap Index tracks the aggregate performance of the 351st to the 619th largest publicly listed companies on the London Stock Exchange main market.
This might sound like a “random” number of stocks, but it succeeds the FTSE 100, 250 and 350 indices. As the name suggests, the FTSE 350 includes the 350 largest stocks by market capitalisation listed in the UK.
“Small cap” simply refers to the small market capitalisations of the companies concerned.
The Corporate Finance Institute defines a small-cap company as a one with a market cap of between $300 million and $2 billion (£265 million and £1.8 billion). However, in the FTSE SmallCap Index, there isn’t currently company with a market cap exceeding £600 million.
The index accounts for 2% of the UK market capitalisation and comprises a mixture of equities, investment funds and trusts, and private equity companies.
Investment funds work by pooling money from several investors. This is overseen by a fund manager, who then invests the funds into a range of assets, such as shares, based upon a thematic investment idea.
Investment funds seek to make a capital gain on investments. They can provide easy access to domestic and overseas assets, at an affordable rate. In a fund, you’re sharing the costs of investment with other people, across several stocks.
As a result, you’re not incurring continuous fees for individual share purchases.
However, be aware that an investment fund can still be prone to volatility and risk, even though it offers diversification across many stocks.
For instance, if the industry on which it focuses is going through a rut, this will likely be reflected in its valuation.
When looking at the index constituents here, you’ll be able to spot the investment trusts (most will feature the word “Trust” in their name).
Private-equity companies are those that buy a stake in private companies in the hope of getting a return on investment. Private companies don’t issue shares to the public, so the best way to gain exposure to them is by buying shares in private equity companies.
The lure of investing in private equity companies is the potential for rapid returns.
Private companies can grow and develop quickly due to the abundant capital and expertise provided by big institutions and backers.
They can expand away from the public eye, without pressure to sustain earnings and standards for investors.
However, private equity investing poses liquidity risk. Funds from private equity companies are typically locked in to a company for a period of up to ten years. If the target company falters, the investor is unable to redeem his/her capital, facing a sustained period of losses. This would then be reflected in the value of the private equity company shares.
When you buy an index, such as the FTSE 100 or the Nasdaq, you’re essentially buying a tracker fund which is underpinned by the index’s value. You’re not directly buying the index.
Due to its small size, there isn’t a tracker that follows the FTSE SmallCap index. So you can’t “buy it” in the way you would other indices.
Nevertheless, you can still gain exposure to the assets in the index by purchasing them through your broker.
You can see a full list of the companies included in the FTSE SmallCap Index here. Stand by for five names below.
What are the risks when investing in small caps in the FTSE?
It’s no surprise that there is some risk inherent in small-cap investing.
Small caps are often young companies/trusts operating in new or niche markets.
They have the potential for rapid growth, especially if a product launch or new acquisition brings them into the public eye and investors jump on the opportunity.
Getting into a small cap before the rest of the market catches on gives a significant opportunity for strong upside gain.
However, because small caps don’t have a solid track record, they can be vulnerable to business or economic setbacks.
They may not have the financial clout, or expertise, to navigate difficult periods.
What’s more, due to limited international exposure, their progress is closely tied to their domestic economy. If macroeconomic conditions in their home country are poor, they’re less able to mitigate this risk. This could leave them more vulnerable to insolvency, which would prevent investors from getting their investment back.
Before investing in a FTSE SmallCap Index company, ensure that you know what type of company you’re buying – whether it’s an equity, investment trust or private equity company.
If you’re buying a trust or private equity company, you need to know exactly what assets it’s investing in, and the thematic idea behind this.
For example, a trust that invests in assets domiciled in politically unstable countries will naturally carry far more risk than a real estate investment trust (REIT) that is inherently less volatile.
Five FTSE SmallCap names that you may never have heard of
- Renewi is a leading European waste-management company. With the global green energy transition hotting up, Renewi’s services could become invaluable. It handles around 14 million tonnes of waste per year, with 89% of it recycled or used for energy recovery.
- XP Power is powering the world-changing industries of the present and future. The company is a leading provider of power solutions, including AC-DC power supplies.
- Medica Group. An emerging area of the healthcare market is “telehealth”. This is when patients can get virtual access to a medical professional, boosting efficiency and convenience. Medica focuses on teleradiology, which allows radiological images, such as CT scans and X-rays, to be transferred between doctors and clinicians.
- Helical specialises in developing the swankiest office buildings in Central London. It might sound a little mundane, but it focuses on developing “smart” buildings, which promote energy efficiency through automation. The company could benefit from the UK’s green energy transition.
- Augmentum Fintech is a private fintech investor, with holdings in high-growth companies in the financial services industry. Its investees include Tide and Zopa.
How to keep updated on small-cap companies
If you want to see the latest, hottest small-cap stocks, TradingView is a good place to start.
Specifically, you can refine your search to small-cap companies, choosing the country in which they’re publicly listed.
You can do this here.
For the FTSE SmallCap Index, we recommend using the Hargreaves Lansdown platform to see the latest developments.
On the platform, you can see the latest holdings, along with the top gainers and fallers over the past 24 hours.
You can see this here.
Then, you can also regularly check out the company website, and ensure you stay up to date with commercial developments. This can be often found under the investor section, where the company releases regular news updates.
Small-cap companies undoubtedly provide some interesting yet potentially lucrative investment opportunities.
Now that you know where to look, see what you can find.
Until next time,
Contributing Editor, Exponential Investor