Of all the generic criticisms one can level against large companies – their lack of invention, a tendency toward managerialism, an inability to move quickly – the past year has also highlighted some of their collective strengths. Be it pricing power, preferential treatment in credit markets or economies of scale: at times of economic stress, mature players usually know how to defend market territory.
These qualities aren’t out of reach for the humble small cap, but nor are they easy to build in short order. And because ‘small’ is usually synonymous with ‘room for growth’, small caps often attract racy valuations. When interest rates rise, recession looms and markets retrench, discounted cash flow estimates get trimmed, cutting down the most highly valued poppies first.
All of which is to say it’s been a tough old slog of late for investors in smaller companies. That much is clear from the performance of our High-Quality Small Cap screen, which posted a 17.7 per cent negative total return in the year to 16 August. While just ahead of its benchmark – a fifty-fifty mash-up of the freefalling Aim All-Share index and the slightly-more-resilient FTSE All Small – it’s nothing to write home about.
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