Despite strong run, still stockpicking opportunities in UK small cap

Even though smaller companies have outperformed large cap companies in the UK in recent years, there are still stockpicking opportunities in the small cap sector. In its Market View on Small Cap, Alliance Trust says smaller companies are benefiting from an encouraging UK economy and from trends such as increasing infrastructure spending, which particularly benefits sectors such as engineers and PFI operators.

Investment Manager John Ewart said, “While recognising the excellent returns from the small cap universe in recent years and that these have made it harder to find value, we remain confident that stock specific opportunities can still be found. Prospects for the oil services sector remain encouraging, while high levels of capital spending on infrastructure both in the UK and abroad are supporting various sectors. In the UK, public and private infrastructure spending has been strong and we expect this to continue supported by a sustained focus on regeneration and large projects, like the Olympics 2012.”

Ewart said that the strong run for smaller companies has made it harder to find value. The FTSE 250 index has outperformed the FTSE 100 index by 110% in total return terms since March 2003. (as at 28 June 2007). Alliance Trust’s small cap portfolio includes companies from the FTSE-250 index and below.

Ewart said, “Smaller companies have benefited from having a generally larger exposure to the UK economy than the largest UK-listed companies. The biggest risk to the small cap sector is that economic growth falls below current expectations. Another potential hazard in the UK is that the threat of inflation pushes interest rates even higher.”