Search for income drives growth in small caps
MAM's Gervais Williams says the FTSE SmallCap’s outperformance of the AIM index reflects a changing attitude to dividend yield at the bottom end of the market.
It is unusual to see markets rising during a period of declining economic growth expectations and earnings estimates.
The imbalances in euroland have not been resolved either and there are some commentators that point to increased concerns over the rise in geopolitical tensions too.
But there does seem to be a change in the market perception that the adverse effects of a Greek exit from the euro seem to have moderated.
Given the uncertain background, it is interesting to note the marked differential in performance between the FTSE SmallCap (ex ITs) and the AIM All Share.
For the eight months between December 2011 and August 2012, the FTSE SmallCap has risen by 21.7 per cent, whereas the AIM All Share is actually down -1.2 per cent.
Some might ascribe the difference to the fact that the AIM indices include a decent percentage of mining companies where commodity prices have been falling.
Performance of indices
Source: FE Analytics
However, it should be remembered that the AIM markets also have many oil and gas businesses that if anything should have been benefiting from the rise in the oil price over the summer.
We believe that the performance differential may reflect our opinion that there is a changing attitude to dividend yield at the bottom end of the market.
The key fact is that the AIM All Share Index yields only 1.28 per cent compared with 3.42 per cent
from the FTSE SmallCap (ex ITs).
Although markets are likely to remain volatile, the strategy of the ACUIM UK Multi Cap Income fund appears well placed to address the new market trends as we move beyond the credit boom.
Through holding around 100 stocks in areas where strong balance sheets have been favoured, the overall portfolio volatility continues to be sub-normal compared with other UK equity income funds.
And yet we believe there is still plenty of scope for our investments to continue to deliver premium returns going forward given that our investment universe looks to be moving beyond a 25-year period of previous underperformance.
Performance of fund since launch vs sector and index
Source: FE Analytics
Gervais Williams heads up the ACUIM UK Multi Cap Income fund. The views expressed here are his own.