Eustace Santa Barbara, co-manager of the IFSL Marlborough Special Situations, UK Micro-Cap Growth and Nano-Cap Growth Funds, makes the case as to why neither ignorance nor apathy should distract investors’ attention from UK smaller companies right now.
Having seen his team relegated after an umpteenth shambolic performance, an exasperated football manager finally snaps and confronts his underachieving star player. “What the hell’s wrong with you?” he rages. “Is it ignorance or apathy?”
The player stares at the ground, thinks for a moment and then shrugs. “Boss,” he says, “I don’t know – and I don’t care.”
I sometimes think of this joke when reflecting on the wider investment community’s attitude towards UK smaller companies. Here, too, ignorance and apathy reign. Many investors know little or nothing about this corner of the equities market, and many of those who do have knowledge of it seem not to give a hoot in any event.
None of this would matter a great deal if such disdain were richly deserved. Yet I would argue that there are numerous reasons why UK smaller companies merit a place in sensibly diversified portfolios with a long-term focus.
Before exploring why, we first need to understand the forces that persuade so many investors to steer clear. In my opinion, crucially, the question of inherent investment appeal has virtually no bearing on the herd’s thinking.
Ignorance: the challenge of too few “eyeballs”
The issue of ignorance is not difficult to explain. Many investors are completely oblivious to UK smaller companies, simply because they rarely – if ever – get to hear anything about them.
For this, with all due respect, we can blame investment analysts – the people whose efforts are central to buy and sell decisions around the globe. The number of analysts monitoring a specific business can vary significantly, and UK smaller companies very seldom top their lists.
Market capitalisation is usually a decisive factor. Particularly in the US, large-cap and mega-cap businesses are likely to be “eyeballed” by hundreds of sell-side analysts. This is reflected in the composition of many index-tracking funds, which tend to be heavily skewed towards the same household names.
In part because of the nature of sell-side remuneration, companies towards the lower end of the market-cap spectrum generate rather less fervour. For example, according to our own research, a constituent of the UK’s mid-cap-centric FTSE 250 Index might attract an audience of around 10 analysts, while a UK micro-cap is likely to pique the interest of just two or fewer.
In other words, the level of analyst coverage for a sizeable proportion of UK smaller companies is roughly zero. As a result, the average investor often has no idea of the opportunities waiting to be discovered in this space.
Apathy: the upshot of dismal dynamics
So what about those investors who are familiar – even if only to some degree – with UK smaller companies? Why might their awareness have translated into indifference or even disillusionment over time?
The prevailing narrative speaks volumes. If we wind back, say, 10 years, the story arc is hardly one of unrelenting joy.
The vote for Brexit dented the appeal of UK equities as a whole. The COVID-19 pandemic brought enormous pressure to bear on smaller companies in the UK and elsewhere. The normalisation of political instability – a revolving door would have been a useful addition to both Number 10 and Number 11 Downing Street during the past decade – has further undermined perceptions of the UK market.
A key corollary of these and other dismal dynamics has been a raft of low valuations. By any standard, many UK smaller companies are cheap – and investors could be forgiven for equating cheapness with sheer unattractiveness rather than with the possibility of unrecognised potential.
The upshot? The consensus might be neatly summed up as follows: “Move along – there’s nothing to see here.”
Negative sentiment as a positive force
As a fund manager who specialises in this arena, I sympathise with the countless investors who have tumbled into these traps. I believe they are in grave danger of missing out – and I am only too happy, of course, to tell them why they might wish to see UK smaller companies in a radically different light.
The principal problem with ignorance and apathy in this context is that they risk obscuring the reality of the situation. In my view, the fact is that many UK smaller companies fully warrant investors’ attention.
First, the era of US exceptionalism appears to be over. Tariff tumult, a weak dollar and the conflict in Iran have driven a rotation away from the world’s biggest economy. Importantly, this shift has gone hand in hand with a transition from growth stocks to their value counterparts – and UK smaller companies surely fit the bill in that regard.
While by no means a foolproof indication of future prospects, historical performance also demands acknowledgement. Deutsche Numis 2025 Annual Review data stretching back to 1955 shows UK smaller companies outshone not just the FTSE 100 but US equities and Treasuries over the course of the ensuing 70 years.
Perhaps above all, rather than signalling a dead end, ignorance and apathy could actually bolster the case for UK smaller companies. It may be well worth remembering that scepticism, pessimism and other negative sentiments routinely serve as fuel for a bull market – in which instance, sure enough, the joke will ultimately be on those investors who neither knew nor cared.
Eustace Santa Barbara is co-manager of the IFSL Marlborough Special Situations, UK Micro-Cap Growth and Nano-Cap Growth Funds.
