How advisers can spot UK small and mid-cap opportunities

By Daniela Esnerova

Go to the profile of Money Marketing
May 30, 2019

As many signs indicate it is a good time for investors to enter the UK stock market, Money Marketingeditor Justin Cash and guests Next Wealth managing director Heather Hopkins, gbi2 managing director Graham Bentley and JP Morgan Asset Management portfolio manager Katen Patel discuss:  How can financial planners make the most of this opportunity in the market?

Just the right moment

Next Wealth managing director Heather Hopkins

Hopkins praised the maturity of UK market investors who are staying the course and not panicking despite the uncertainty poisoning the market. However, the panel agreed with Bentley that while those already invested are staying the course, “a lot of spare cash is waiting on a sideline,” as other investors are waiting for what they think is the right time to get in.

Patel shared what he sees as the reason behind this waiting around: “It is just uncertainty, investors hate that.

“The sentiment does not reflect the environment companies are operating in.”

He explained: “The valuations throughout large cap, mid cap, small cap are depressed and the further you go down the market cap down, the valuations are more attractive.”

Bentley responded saying the risk of this waiting for the right moment may mean investors will miss the opportunity altogether.

Large cap, mid cap, small cap?

gbi2 managing director Graham Bentley

Financial planners looking to enter the UK market face more tough decisions than simply the “when”.

“The asset allocation decision is not just about ‘how much shall I put in the UK?’ It’s then about how to proportion it,” Bentley explains.

“If you are a long-time investor making choices between the three [small, mid and large cap], you would lean towards small cap, but people think that carries too much risk.

“If you are going to use platform’s asset allocation tool, there is a dictate there, because it says if you are risk profile five, there is X amount of UK stocks. But very few then go on to say how much small cap you should have and how much mid cap.”

Bentley said this poses issue for many advisers: “Who is going to tell me [an adviser] how to split that? Why don’t these people running asset allocation committee tell me how can I blend it together?”

Sorting the wheat from chaff?

Are advisers, left without recommendations from their tools, well positioned to do the splitting themselves? Or should they decide to “just buy all the companies and let the manager sort it out themselves?”

The panel agreed that one of the unintended consequences of MiFID II is that middle and smaller caps are less researched, which may be a barrier for a planner doing the asset allocation.

This does provide an opportunity for active fund managers though- they have the resources to do the research, to sort the wheat from the chaff.

Bentley said: “As an active manager you are looking for misprice, you are less likely to find companies like that in large cap, because of the [availability of] research.”

Leaving it up to the asset manager

JP Morgan Asset Management portfolio manager Katen Patel

When a Wired viewer asked the panel about the expertise of asset managers in this area Patel said they have an advantage because they have “resources to access the research and see the companies that you want.”

Bentley went on to recommended planners also do their research:

“A fund’s history is not about the fund, it’s about the fund manager running the fund.”

He recommended advisers look at who has been running the same fund for the last ten, 15 years or 20 years to see a track record of their ability. He suggests this will show it is being run by someone using wisdom and experience from that period, rather than by someone who took over the fund two weeks ago.

No right or wrong

Whether planners decide to do the asset allocation themselves or leave it up to a fund manager, they should be ready to back up their decision.

Hopkins said when investors were asked why they pay for advice, the most commonly cited reasons was “to access a better market returns.”

Hopkins then explained advisers should do a better job articulating their proposition, and how this helps the client achieve precisely that. Whether it is by their robust in-house processes, or investment outsourcing, advisers should be ready to explain their approach to their clients in plain English.

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