Investing by company size: what’s large and what’s small?

August 2020

Investment trusts will often signify if their remit is to invest in small, medium or large companies. So, in investment terms, what defines ‘small’ and ‘large’? In this short video, we’ll explore the parameters that define them and dispel a few myths along the way.

Transcript

Henderson Smaller Companies and Lowland Investment Company are both investment trusts within the Janus Henderson stable focused on the UK market. The former, unsurprisingly, invests in smaller companies, whilst the latter has a mixture of small, medium and large-cap companies in its portfolio. So, in investment terms, what defines ‘small’ and ‘large’?

A company’s size is determined by its total value or capitalisation: the current share price multiplied by the number of outstanding shares in issue. In the UK, large ‘cap’ companies are typically regarded as those listed in the FTSE 100 Index – those with a value in excess of £4 billion and representing roughly 80% of the London Stock Exchange market. The next tier in terms of size is the FTSE 250 Index – Henderson Smaller Companies is a constituent of this index, and it comprises the 101st to 350th largest companies quoted on the UK market, and circa 17% of the overall exchange. Small ‘cap’ stocks are those valued at under £500 million, and as little as £75 million, representing about 3% of the market.

This dispels the common misunderstanding that small-cap stocks are start-up businesses with no track record. The reality is very different in that many smaller companies – in common with their more substantial counterparts – are well-established and have very strong financials. Indeed, the FTSE Small Cap Index (those businesses outside the UK top 250) contains a large number of household name businesses: AA, Foxtons, Halfords, Lookers, Metro Bank, Saga and Topps Tiles to name just a few.

Typically, a well-diversified portfolio will include a mix of large and smaller holdings – the former offering relative solidity and strong dividend performance, with the latter offering the potential for rapid growth.