Last year’s Brexit referendum has created a huge amount of uncertainty for British businesses and the election of a minority Conservative government has muddied the waters even further. The lack of political leadership has made it difficult to assess the long-term economic impact of our departure from the EU on domestically focused companies, many of which tend to be at the small-cap end of the spectrum.
The fall in the value of Sterling since the referendum has provided a major boost to the large caps in the FTSE 100 index, which on average derive 70% to 80% of their revenues from overseas. UK smaller companies have received less of an advantage as 60% of their business originates in this country, but if the economic outlook improves and the pound recovers it would be the small caps that would be the main beneficiaries.
When choosing a small cap fund it is essential to make sure that the manager has excellent stock selection skills, as the range of possible investment outcomes is enormous. Many of these businesses operate in niche markets and are hugely profitable, whereas those with high debt or that are susceptible to competition are extremely vulnerable and could fail altogether….