Smaller Companies outperform larger corporations

July 23, 2012 - PRLog -- Two pioneering professors of London Business School have joined efforts to put together the Numis index, formerly known as RBS Hoare Govett Smaller companies index, an innovative benchmark tool that facilitates broking, advising and researching for UK smaller companies.

The Smaller Companies Index date back to 1955 and has since then built a reputation as the primary benchmark for small cap investing, supporting over 800 companies which form an estimated 10% of the overall UK market by value.

The dynamic duo, Paul Marsh and Elroy Dimson both professors of finance at the London Business School have secured a licensing agreement with Numis Corporation which will see that Marsh and Dimson receives fees and royalties for their performance, excluding initial consideration payments.

Data from 2012 Numis Smaller Companies Index global data revealed that small companies in troubled European regions such as Greece and Spain which has seen fallen equities from the beginning of the year have continued to out-do larger companies by a respective 900 and 290 points. “Everything is affected by news flow these days — it doesn't take much for people to trade, and liquidity is low,” J.O Hambro’s, commented.

As the rest of Europe continues to struggle under the weight of the recession, smaller companies have not escaped the effects of the seemingly endless sequence of bad news as seen in the second half of 2011 when small caps stock fell ferociously pulling larger cap stocks globally by 900 points.

However, the Numis Smaller companies index which monitors just 10% of UK public companies, performed better that the FTSE all-share index by 830 points in the first six months of 2012.

Whilst many in the corporate finance world assume that smaller companies have a higher chance of failing in slower economic growth, Frank Hanson, chief investment officer at equity specialist RCM, Frankfurt, believes otherwise, “if you look over the last decade, they have actually outperformed (large-cap stocks) dramatically. This is accompanied by better earnings growth, as well,”

Smaller companies are gradually becoming global brands, he says.  Even as growth in the economic remains stagnant in most part of the developed world, “it's not low on a global scale, it's there,” he says. The level of growth is enough to allow these companies generate sufficient profit to keep them on their feet.

Hamish Galpin, director and head of smaller companies at Hermes Funds managers Ltd agreed that the companies are not as small as they appear because many of them have strong international presence.

Other development in the corporate finance industry indicates that Banks are starting to reduce analyst cover to manage costs which has direct impact of small caps stocks just as assets in European small caps remains flat.

“Europe has been a no-go area both in the institutional and broader intermediary space for (some time),” he said. “It's only really now in the last six months that interest has been back a lot stronger. I would expect it to grow a lot from this level”, Says Peter Preisler.

For more information on professor Paul Marsh and Elroy Dimon or corporate finance programs at London Business School, visit http://www.london.edu/programmes/executiveeducation/finan...