In a recent interview with FE Trustnet, Rathbones’ Alan Dobbie insisted that the outperformance of mid caps over large caps was only a recent phenomenon, pointing out that prior to 2000, large caps were the dominant force. However Brough, who heads up the £1.4bn Schroder UK Mid 250 fund, says this argument is fundamentally flawed.
"The 10 years prior to 2003 were better for large caps because you had the TMT boom," he explained.
Performance of indices 1990 to 2000
Source: FE Analytics
"The likes of Vodafone, BT and Marconi – which at one point was the 12th-biggest company in the UK – were the ones responsible for pushing the FTSE up to 7,000 or so," he explained.
"The FTSE 100 will outperform at certain points, but you’ve got a lot more room for growth in the FTSE 250, because the companies are coming from a lower level."
"The fact that large caps did better over that period is because of the statistical freak that was the dotcom bubble."
Brough’s argument is backed up by data; according to FE Analytics, the FTSE 250 has significantly outperformed the FTSE 100 since the indices were first launched back in 1985.
Performance of indices since 1985
Source: FE Analytics
The bulk of the outperformance has come since 2003, but the FTSE 250 beat the FTSE 100 in the late 1980s and early 1990s as well.
The biggest advantage that the mid cap index has over the FTSE 100, Brough says, is the greater diversity of stocks and sectors.
"The FTSE 100 is massively skewed towards a handful of sectors," he said. "Unless pharmas, banks and miners are doing well, you’re not going to see the index do that well."
"In the FTSE 250, you’ve got a lot more variety, and nowhere near as much concentration."
Brough also points out that the FTSE 250 has a very high turnover of companies, meaning that it is possible to constantly find new opportunities in the market. This, he says, is not the case in the FTSE 100.
"I liken the FTSE 250 to Heineken, in that it’s refreshed like no other index," he said. "In 2003 alone, there were 103 changes in the index."
"Since we launched the fund in 1999, there are only 50 original constituents."
"We’ve just had another reshuffle recently and will lose Travis Perkins, so I’ll be selling that."
He says he has a very disciplined approach to selling companies that are promoted to the FTSE 100, because this is often the beginning of the end of their glory days.
"It’s a big jump to get in to the FTSE 250, and it is not always a good omen," he said. "It’s a bit like a football club like Reading – it’s great when you get in to the Premier League, but all the good performance has come from being in the lower leagues."
"When you get in to the FTSE 100, it’s harder to grow. Getting in to the index is as good as it gets sometimes."
"When one goes in, we pick up something else."
Mid caps' stellar run has prompted some managers to question whether there is value in the index.
Brough thinks the outlook for mid caps remains good, however, and highlights three stocks that are particularly good value at the moment.
"I like Raven Russia, a commercial property company that specialises in Russia, and particularly Moscow," he said.
"It’s got a yield of 12.5 per cent and is on a discount of 10 per cent to its net asset value (NAV). The Russian economy is looking a lot better, particularly compared to the UK."
Brough is backing multinational fabless semiconductor company CSR. While it has already had a very good run, he thinks it remains attractively valued.
He is also a fan of internet gaming company Bwin – especially if gambling gains traction in the US again.
"Prior to illegalisation, the internet poker industry generated $800m in the US, now it’s zero," he said.
"If it opens up again, it could be a real opportunity. New Jersey has re-regulated, and all it takes is California to change its rules and it could be big news."
Brough has managed the Schroder UK Mid 250 fund since its launch in 1999. It had a great start, but since the financial crisis, it has struggled to beat its FTSE 250 (ex ITs) benchmark.
Performance has improved recently, and the fund is up versus the index over a one-year period.
Performance of fund vs sector and index
| Name | 1yr returns (%) |
3yr returns (%) | 5yr returns (%) | 10yr returns (%) |
|---|---|---|---|---|
| Schroder - UK Mid 250 | 45.51 | 59.16 | 49.79 | 206.07 |
| FTSE 250 Index (ex IT) | 36.2 | 58.5 | 72.4 | 276.62 |
| IMA UK All Companies | 23.68 | 38.92 | 33.41 | 120.93 |
Source: FE Analytics
Brough explained some of the reasons behind the improvements in performance in a recent FE Trustnet article.
Schroder UK Mid 250 requires a minimum investment of £1,000 and has an ongoing charges figure (OCF) of 1.66 per cent.
