Not only are the FTSE 250’s long-term returns among the best in the world but UK mid-caps have also outperformed their larger peers in the FTSE 100 since the EU referendum, according to JP Morgan’s Georgina Brittain.
Brittain, who has overseen JP Morgan Mid Cap Investment Trust since 2012, said UK companies with a market capitalisation falling in the middle of the pack have proved resilient even after the EU referendum.
“In the aftermath of the Brexit referendum, the entire consensus of the market was ‘sell mid-caps, sell small-caps and keep UK large-caps’ because they are very much non-domestic,” said Brittain. “But that just wasn’t right.
“Mid-caps have done really well since June two years ago. The FTSE 250 has outperformed the FTSE 100 over the two-year period.”
Over the last two years, the FTSE 250 has delivered a 34.56 per cent total return compared with a 26.35 per cent gain for the FTSE 100.
Performance of indices since Brexit referendum
Source: FE Analytics
Brittain said Brexit has proved to be less calamitous for mid-cap stocks than many expected, although she doesn’t regret her decision to reposition the portfolio she runs with Katen Patel just hours after the referendum result emerged.
“The day after the EU referendum we decided to do a significant shift to our portfolio,” she explained. “We did that on the basis that some things were very foreseeable: sterling was going to be weaker, inflation was going to go up… Therefore, we wanted to very significantly underweight the [UK] consumer.
“As an income tracker that was exactly the right thing to do. We had been very overweight consumer-exposed companies in the few years prior to the vote and for a good reason, as consumer was really having a good time in the UK.”
Brittain said: “Inflation did exactly what we expected. However, it has now come back down so the picture is not nearly as bad as we expected. Consumer is not booming but the wall hasn’t fallen, so things are not as people thought they were going to be.”
The under-researched nature of these companies compared with their larger peers also supports the investment case for mid-cap stocks, which also tend to be very limited by the overall market impact of Brexit.
“The perception after Brexit was that the FTSE 250 revenue exposure was 100 per cent UK but that isn’t correct,” she explained. “Half of the FTSE 250 is international – those 50 per cent are very much benefitting from the expansion in global PMIs.”
Indeed, strong PMI data and economic expansion has also been seen in the UK boosting the outlook for domestic stocks.
“Looking at the PMIs, sure, we can see what happened in June two years ago but PMIs are in the areas of expansion now – ignoring construction,” the JP Morgan Mid Cap manager said.
“Our largest concern was that companies would stop investing, and, indeed immediately after the vote we got a huge number of UK-focused companies coming to see us.
“We asked them: what are you going to do, what are you thinking? And one of two very specific firms said to us: we are going to put this project on hold.
“The good news is that quite a few of those things that were put on hold have now taken place. So, there was a delay but not a collapse,” Brittain noted.
As the Bank of England’s Decision Maker Panel Survey suggested, nominal investment was around 3 per cent to 4 per cent lower over the year to 2017 signalling that Brexit weighed on business investment growth in the year to end-2017. However, the same survey suggested that these Brexit-related effects on business investment growth are expected to diminish over the course of 2018.
Brittain said investors in the mid-cap space can also often benefit from greater growth prospects than are on offer in the large cap space.
Indeed, since launch in October 1992 the FTSE 250 has delivered a 1,637.25 per cent total return.
The index market capitalisation has risen from £98bn at launch, to £453.2bn today and includes international packaging business DS Smith, property developer Berkeley Group or professional services Capita make up the FTSE 250 index among its top ten holdings.
Performance of indices over 15yrs
Source: FE Analytics
Over fifteen years, the FTSE 250 (ex IT) has delivered a 568.18 per cent total return compared with a 566.84 per cent gain for the next best performer among Brittain's global indices for comparison, the EMIX Smaller European Companies Ex UK.
However, the fund manager said there are many reasons for the long-term outperformance of the index.
She explained: “A number of UK mid-caps are earlier stage in their life cycle than the FTSE 100 and, by definition because they are smaller it is much easier for them to grow significantly.”
The investment trust manager added: “I have been managing money for a long term and I think the quality of management in the mid- and small-cap [sectors] has dramatically improved over the last 20 years.
“They don’t have the sort of legacy issues that Lloyds has or some large banks still have. They are more stable than smaller companies and they are disruptors.
“They tend to be smaller and less efficiently run so there is more opportunities for business improvement.”
The increasing number of M&A taking place in the mid-cap space also signals that there is value to be had, the manager said, highlighting 10 bids registered for FTSE 250 firms during the first half of the year.
“We definitely believe a lot of the companies we are investing in the mid-cap arena benefit from M&A,” she said. “They tend to buy smaller companies that are family-owned, so, very frequently we hear the story about how they’ve been winding and dining these companies for up to five years.
“And that build-up of knowledge is important: when the family is selling out their businesses they’ve got different priorities to the rest of the world.”
“We really do find this very important,” she said. “Of course, these families want the money but they actually care about their employees, it matters to them what home they go to.”
Over five years, JP Morgan Mid Cap Investment Trust has delivered a 132.69 per cent total return compared with a 62.55 per cent gain for the average fund in the IT UK All Companies sector and a gain of 77.95 per cent for the FTSE 250 (ex IT) index.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
The fund is 4 per cent geared and is trading at a 5.6 per cent premium to net asset value (NAV), data from the AIC shows. It has an ongoing charge of 0.86 per cent.