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Why invest in smaller companies?

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Judith MacKenzie
Judith MacKenzie

Partner and Head of Downing Fund Managers

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Following the success of the UK’s rapid vaccine rollout and the potential for a strong economic recovery as the country emerged from lockdown, the UK smaller companies sector was positioned as one of the most attractive markets for investment across the globe through H1 2021. 

The Alternative Investment Market (AIM) is currently home to over 800 small UK based companies with a combined value of more than £150 billion.* We believe the AIM market is hot right now, offering some great investment opportunities. 

Smaller companies are often undervalued, can offer attractive returns, and have the potential to outperform larger companies over time.

Room for substantial growth

By smaller companies we generally mean companies with a market capitalisation up to £500 million. These businesses are large enough to be established, but small enough to have considerable room to grow and generate big gains - with the flip side being greater volatility.

Downing Fund Managers (DFM) focus on AIM listed companies which, by function of their size, can grow their earnings faster than larger businesses. Over the long-term, a company’s growth in earnings is the key factor behind the performance of its share price.

Since AIM’s inception in 1995, over 1,600 companies have raised over £125 billion of initial and ongoing funding to support their growth.* And while there’s no doubt smaller companies carry more risk than those listed on the FTSE 100, they also have more potential for significant growth.

Hidden gems at lower prices

To help manage risk and drive strong returns for investors, DFM use a ‘private equity’ approach to investing in the shares of publicly listed companies. This means conducting extensive ‘in-house’ research and deep-dive due diligence before deciding to invest and, once invested, using their expertise to help management teams to succeed. 

Large companies have many investment analysts looking at their every move and their shares are traded regularly and in high volumes. In contrast, smaller companies tend to be under-researched and therefore misunderstood by the market so can often offer investment opportunities where the market price of a company is less than its fundamental value.

This makes the smaller companies market ripe with opportunities. DFM aims to take advantage of this by using a rigorous due diligence processes, rather than relying on third-party research, to drive investment decisions. 

By buying shares at a relatively cheap price and engaging positively with management to add value, the goal is to increase the price of a company’s shares over time and reap rewards for investors.

Potential outperformance

Over a medium-long term investment horizon, the combination of these two factors – higher growth potential and favourable pricing – can create the conditions for improved investor returns and aims to lower investment risk.

There is strong evidence that smaller companies tend to outperform larger ones over time.

In the past five years, the AIM All-Share Index has increased by 63% compared to the FTSE 100 Index, which has increased by c.5% over the same period.**

But, of course, with smaller size comes higher risk. In particular, you may not get back the full amount you invest. In addition, past performance is not a guide to future performance.

If you would like more information on the AIM products we offer, please get in touch at

* London Stock Exchange (August 2021) ** Five years to 7 August 2021 (London Stock Exchange)


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