Last year the FTSE small company index delivered total returns of 44% compared to just 14.4% by the FTSE 100….
We would all have appreciated some advice in that direction then?
You know the benefits of holding growth firms but isn’t the principle still true that small firms are just inherently more risky?
Apparently not always, not anymore.
Sure small firms can still be risky, even in an upturn. But only when they are new entrants to a market, or they are small players in the market or they rely on a local market.
Interestingly, some holdings are none of the above because of the new long tail that’s changing markets and business around the globe.
Because of this long tail, many British small firms/ funds are cheap, growing rapidly and don’t represent speculative or risky punts at all
What’s this long tail then?
Traditional Local Business unable to service the long tail …
Cinema Demand Curve
The cinema must focus on westerns, Disney and horror to stay in business – no long tail.
The world has changed in other sectors though…
New forms of communication (text, apps, social, internet etc..) together with trade and logistic advances enable British firms to now grow into world leaders in the long tail…
World Chocolate Flavour Demand Curve
EG:
In traditional distribution models, you would have been bonkers to be a specialist chocolatier in only semolina and tapioca flavoured chocolates. These days a firm could grow to be a fair size because how many semolina chocolate munchers does that mean there are in the world? (Ambrosia- the world is waiting!)
And the tail keeps getting longer….. you probably don’t do yoga, you almost certainly don’t do it whilst clinging on to a rock face?
There are plenty of these people in the long tail who do though…. http://www.yogaclimbing.com
This long tail means that some small British businesses are not reliant on the local market and have large market share in their piece of the tail. Of course, many also have strong management with skin in the game and are the best in the world at what they do. International small players!
Ed Beal, from Dunedin Smaller Companies seems to have a good grasp on this, here are a couple of UK “Best in the World” he holds and recommends:
Domino Printing – LSE:DNO – British best in the world at continuous printing onto packaging – growth from regulations demanding more printing onto packaging to trace foods and pharmaceuticals.
Victrex – LSE: VCT – British best in the world at producing the PEEK polymer (high grade), a substance with chemical, heat, light and weight and wear advantages over metal and plastic.
Ed says performance may be more muted than the 44% but that the fundamentals will be the main factor driving the share price.
I agree with him on his point about the fundamentals, is anyone aware of other British focussed small business products or ideas?
Interesting as always Steve, thank you. Can you give me a call please, William.