A year ago, our High-Quality Small Caps screen was on the slide. After posting a 14.4 per cent compound annual total return between 2012 and 2021 – some 3.5 percentage points ahead of its benchmark – its 2021 and 2022 cohorts conspired to wipe out any historical alpha.
A combination of higher interest rates, high stock concentration and foul sentiment towards UK smaller companies – particularly towards smaller UK companies with big prospects – resulted in an almost linear dive in the portfolio’s notional value. When we refreshed the screen 12 months ago, the big hopes lay in the prospect of an end to interest rate hikes, a bit more diversification, and the possibility that this corner of the equity market might start to look too cheap to ignore.
Two months in, however, the downward momentum showed no sign of a let-up. With six of the seven picks in the red, including major de-ratings for tissue-healing biotech Advanced Medical Solutions (AMS) and medical technology outsourcer Uniphar (UPR), the class of 2023 was collectively off by almost 10 per cent. Both the FTSE Small Cap and Aim All-Share indices from which the stocks are drawn were down, but not by nearly as much.