The manager of the £489m Schroder UK Smaller Companies fund says she is concerned that the uncertainty generated around the two events as well the potential outcomes could knock back consumer confidence. “Political risk is a major threat to markets at the moment. We are getting quite mindful that we have an election in a year’s time and before that we have the Scottish independence vote – they are both getting quite close,” she said.
“In the coming general election it looks like there will be a change of some sort and the uncertainty is there over what measures will be brought in at the beginning of a new parliament to continue to get government spending under control.”
On top of this, the Scottish Independence vote will provide uncertainty over the future of Britain’s economic and business infrastructure, Banyard says.
“Both could undermine or destabilise consumer confidence through uncertainty,” she added.
Banyard says the build up to the two events – the independence vote is four months away and the general election is approximately 12 months away although the date is yet to be announced – have caused her to increase her exposure to less cyclical areas.
“It is not so much that we are reducing consumer exposure but we are making new investments from new inflows elsewhere and away from the consumer area,” she explained. “We are not going to be rushing to buy back consumer stocks anytime soon.”
“Also, if you look at what is going on higher up the market cap scale with [gambling] rules, the lack of clarity over the government’s energy policy and the budget annuities mix-up, you don’t know where the next thing is coming from. All you know is it’s going to be anti-business.”
The huge amount of liquidity pumped into the global economy from central banks’ stimulus programs, combined with low starting valuations, have helped small and mid-cap funds deliver excellent returns since the financial crisis.
Whilst the UK market has performed generally very well since 2008, the lower end of the cap spectrum has seen the sharpest rise, particularly over the past three years.
The FTSE 250 and FTSE 100 saw similar performance between March 2009 and the beginning of 2012, but since then mid-caps have pulled away considerably.
The FTSE 250 is up 140.69 per cent compared to 91.44 per cent from the FTSE 100 over five years, our data shows.
Performance of indices over 5yrs
Source: FE Analytics
The strong re-rating of domestic stocks as a result of improving investor confidence was a particularly big driver in 2013.
Banyard says valuations in some of the more cyclical areas are looking a little stretched, and have prompted her to increase her weighting to stocks that derive more of their revenue streams from overseas.
“At least if you’re investing in things with an international spread of sales then there is a limit to how much government can interfere,” she added.
The Schroder UK Smaller Companies fund has outperformed its IMA UK Smaller Companies sector average over three years with returns of 67.29 per cent. It has fallen slightly short of its FTSE Small Cap benchmark, though.
Performance of fund, sector and benchmark over 3yrs
Source: FE Analytics
Over five years the fund has beaten its benchmark by more than 40 percentage points, returning 196.19 per cent. It has also beaten the sector average over this period.
As well as the threat of politics, Banyard says the increasing strength of the pound could become a big problem up and down the cap spectrum – particularly for companies generating revenues from exporting.
“There have been currency related downgrades on quite a lot of stocks recently with more than half of the earnings revisions in April in small caps downward,” she said.
“It was the least number of percentage upgrades in 14 months which may well have been due to currency.”
“However, the market is aware of it and is being reasonably forgiving for now, believing the downgrades are currency-related and not transactional-related.”