When choosing to invest, the vast array of information provided can often make the decision on where to place your money a difficult one. For some, the goals are long-term, for others, it’s a short-term plan. Regardless, the objective is to turn the investment into a substantial profit.
So in this blog, we explain what UK Smaller Companies are, their advantages and disadvantages, and the risks associated with investing in them.
What is a UK smaller company?
UK Smaller companies are those that have a smaller market capitalization or are seen as small-cap stocks on the stock market.
The industries they operate in are varied but can cover technology, healthcare, industrials, and real estate. For the most part, companies falling under the title of a UK Smaller Company will be relatively new or perhaps less established than the larger companies people often invest in.
Investing in a UK smaller company is often seen as an excellent opportunity to benefit from fantastic growth, but at the same time, due to the size of the company and market volatility, the risk level can be seen as quite high. For most investors, investing in a UK smaller company is a long-term investment.
What industries will I find in UK smaller companies?
As mentioned above, companies that come under the umbrella of UK smaller companies come from a variable collection of industries. In the Aberforth UK Small Companies Fund, our industry weightings are split across eleven sectors.
·Basic Materials
·Consumer Discretionary
·Consumer Staples
·Energy
·Financials
·Health Care
·Industrials
·Real Estate
·Technology
·Telecommunications
·Utilities
Why would investing in UK Smaller companies be attractive to investors?
Investing in UK Smaller Companies can be attractive to many, and presents investors with an opportunity to create a diverse portfolio that could reap rewards over the long term.
Growth potential
Investing in something like the Aberforth UK Small Companies Fund can see substantial growth over the long term. Smaller companies often have more potential for growth than those that are already well-established. This can be alluring for investors as the potential to buy cheaply and eventually sell at a profit can be much more prevalent. Often, companies listed as a smaller company are found in more niche markets too, perhaps somewhere that is an emerging sector and one that will only continue to grow. Many companies within the smaller companies sector are at the forefront of innovation too, and as a result, investors stand to benefit from changing market trends as the companies they are investing in are leading the way.
Agility and dynamism
Smaller companies are often more agile than larger, established businesses. Such agility only stands to be of benefit to investors, as when trends or regulations change, the smaller companies can respond faster without the red tape that larger businesses may need to cut through.
Potential for mergers and acquisitions
Smaller companies can be attractive targets for larger businesses looking to expand their market presence. As a result, investors can reap the rewards of such acquisitions or mergers when the small company they hold an interest in is purchased by a larger company at a premium.
Diverse sector representation
As you will have seen above, the Aberforth UK Small Companies Fund invests across a range of sectors. For many investors, this diversification allows access to different sectors of the economy, and as a result, benefit from trends that may be specific to only one or two sectors at a time. Think of it as spreading your investment across several industries that are all expected to improve in performance.
Why would you not invest in UK smaller companies?
As with anything that has a pro, there is almost always, inevitably, a con. Investing in UK Smaller Companies, like any investment does pose risk.
High risk
We touched upon this earlier but investing in smaller companies, whilst alluring in some ways, can also be significantly riskier than investing elsewhere. Larger companies that are more established are in that position for a reason. They are proven, successful and trusted. An investment in them may not deliver the same return as one in a smaller company, but the risk of loss is less.
Smaller companies tend to have less financial stability, lower liquidity in stocks and an increased chance of volatile share price performance.
Limited resources
Smaller companies are often held back from developing themselves into something bigger due to the more limited resources they have when compared to the more established businesses. This can be a hindrance for investors as the growth they had hoped for may not come at all. Smaller companies gradually become dwarfed by the growth and development capabilities of the larger companies and as a result, deliver less value for the investor.
Overall, investing in smaller UK companies can offer exciting opportunities for growth and portfolio diversification. It does come with risk though and should be considered carefully. To view how our UK small companies fund has been performing, you can view the income and distribution history and should you have any questions relating to this fund, please contact us to find out more.
