Last year was another challenging year for the investment trust investor. It is still the case that discounts on average remain at their widest since the financial crash of 2008-09 – at one point having been at their widest since 1990. Little wonder the FTSE All-Share Closed-Ended index (representing investment trusts) once again trailed indices. Of the categories that underperformed, the extent to which sentiment trails the fundamentals is perhaps at its most pronounced in the smaller companies sector. As we enter 2024, this sector is set to have its moment in the sun.
An overweight exposure to smaller companies has been one of the more reliable investment strategies in generating higher returns over time, relative to the wider market. Recent figures suggest that, since 1955, the Numis Smaller Companies Index excluding Investment Companies (NSCI), which represents the bottom 10 per cent of the UK market, has beaten the FTSE All-Share on average by over 3 per cent a year on a total return basis. Small figures compound over time. While the FTSE 100 has made little progress since 2000, the NSCI has risen over two-and-a-half times.
There is an inherent logic to this. Elephants do not gallop. Many smaller companies operate in niche and growing markets, are nimble and exhibit faster growth in part because they are benefiting from the advance of technology. This is not just helping to reduce costs and open new markets, but is better enabling them to embrace the disruptive practices needed to compete with their larger brethren. There is no reason to suggest this will not continue over time.