The index has enjoyed a good 2013 and broke through its record level – 15,000 – in the summer. According to FE Analytics, over one year it has returned a hefty 30 per cent, 10 percentage points more than the FTSE 100.
Performance of indices over 1yr
Source: FE Analytics
However, Costar (pictured) says this is the most expensive that mid caps have been in his career.
"We are now very underweight mid caps, I think it is the lowest we have ever had actually," he said. "We have about 12 or 13 per cent of the fund in them, but that is spread across four stocks. If you think about it, there are 246 mid caps that we don’t own."
The manager adds that one of the main reasons for his underweight position is because investors want to raise their risk exposure, but have not been willing to dip as low as smaller companies.
"It is the most overcrowded area of the UK market and that is because people have not wanted to hold FTSE 100 companies and so instead have bought mid caps. Because of that, it is an area where there is a lot of overvaluation."
"There are some fabulous companies in the FTSE 250 that I would love to own, but there is a difference between a great business and a great investment. It has been very easy for investors to make money from UK equities this year. All you had to do was be overweight mid caps and underweight large caps."
"However, I think that shows us that when you see such unsustainable moves in certain share prices compared with others, then I think you should expect a pullback of some description," he added.
The manager’s thoughts were echoed in a recent FE Trustnet article.
Our data shows JOHCM UK Growth is a top-quartile performer in the highly competitive IMA UK All Companies sector since its launch in November 2001. It has returned 218.98 per cent over this time, beating the FTSE All Share by more than 100 percentage points.
Performance of fund vs sector and index since Nov 2001
Source: FE Analytics
The fund also boasts top-quartile returns over one, three, five and 10 years.
Despite Costar’s concerns about the price of mid cap stocks, he remains upbeat about other areas of the UK equity market.
The manager says he has found very good opportunities in the mega cap and micro cap areas, where he feels there are some top quality companies that, because of their size, have been left behind in the rally.
In the mega cap space, he has been buying shares in the likes of GlaxoSmithKline and AstraZeneca, for instance. However, he says growth-seeking investors have never had it so good in the lower parts of the UK equity market.
"The opportunities in the sub-£350m market cap bracket are the best I have seen in my investment career," he said.
"That is because of structural changes and the persistent de-allocation of UK equities from UK investors. At the start of my career, 35 per cent of UK equities were owned by long-term UK investors – that figure is now 6 per cent."
The manager says that investors have been able to diversify more easily recently and are actively allocating abroad into internationally focused funds. However, Costar also says there is another reason why investors are looking at the very bottom of the UK stock market.
"Since 2008, there has been a focus on what can go wrong and how we can preserve capital instead of what can go right and how can we accumulate capital," he added.
YouGov, listed on the FTSE AIM, is one of the micro caps he has been adding to his portfolio.
He describes YouGov as a “fabulous company”, saying that it performs well regardless of the economic backdrop and is willing to invest in itself for growth.
YouGov is an £80m professional market research agency that collects data for public consultation.
The stock itself has largely underperformed so far this year, however the share price has rebounded over the last few months, as the graph shows.
Performance of stock over 1yr
Source: FE Analytics
Costar feels the share price will re-rate significantly as the market realises YouGov’s investment-led growth potential.
"There was a barnstorming set of results from scalable data and research provider YouGov which fully justified our continued faith in the business," Costar said.
"The company is just beginning to reap the benefits of a sustained investment programme in high margin, replicable products, and we anticipate that organic revenue growth will continue to accelerate."
"We believe the shares are completely the wrong price. It is one of a number of exceptionally attractive small cap assets in the portfolio where we believe there is very material upside," he added.
The size of the company means it is not one of Costar’s top-10 holdings. FF&P UK Small Cap Equity is the only portfolio in the IMA universe that holds the stock in its top 10.
JOHCM UK Growth requires a minimum investment of £1,000 and has a total expense ratio (TER) of 1.39 per cent. However, like other JOHCM funds, the portfolio implements a performance fee of 15 per cent if it outperforms its FTSE All Share benchmark.
