The FTSE 250 has hit a record high with the index comfortably beating the FTSE 100 and the S&P 500.
The fact an index hits a record high is not itself a buying signal, but the attraction of investing in medium-sized companies are plain to see in the long-term performance figures. Over twenty years, the FTSE 250 has wiped the floor with the big blue chips of the FTSE 100, and indeed those of the much-vaunted S&P 500, which has found itself in so much favour with investors of late. Indeed, the FTSE 250 has been the best performing segment of the main UK market since the turn of the century.
Laith Khalaf, financial analyst at AJ Bell, comments: “Most active fund managers investing in the UK will be overweight mid cap stocks and underweight the FTSE 100. That’s compared to the benchmark FTSE All Share index, of which around 80% is made up of the big FTSE 100 blue chips. Indeed the strong performance of the FTSE 250 should also be a tailwind for active managers as a whole, as a result of their additional exposure to this area. Fund managers can often find better opportunities in medium-sized companies, as these are less well researched by global analysts. They are small enough that they still have room to grow, but large enough that they are established businesses with existing customer bases.
“The FTSE 250 is more domestically focused than the FTSE 100, but that isn’t hard given the highly international leanings of many of the biggest companies in the blue-chip index. However the mid cap index still has its fair share of companies which derive a healthy slug of their earnings overseas, so it’s not the pure barometer of the health of the UK economy that it’s sometimes presumed to be. Indeed companies like the cruise line operator Carnival, travel operator Tui, and the software company Microfocus International, are all sufficiently global that they report their earnings in dollars and euros, not pounds.
“The FTSE 250 is also home to a large number of investment trusts which themselves invest outside the UK. Fidelity China Special Situations, Schroder Asia Pacific trust, and JP Morgan Japanese Investment trust are just some of the names that can be found in the index. So by investing in the FTSE 250 index, investors shouldn’t get the impression they are investing exclusively in the UK.
“While the FTSE 250 has just hit a record high, the FTSE Small Cap sector has actually been marking new record highs since last December. Again it’s an index that can be easily overlooked given the attention lavished on the FTSE 100, but it too has been a source of exceptional returns, particularly for active managers operating in this area. Mid and small cap stocks can exhibit higher levels of volatility, reflecting lower levels of liquidity and the potential for business performance to surprise the market, both on the upside and the downside. But long-term investors should definitely be taking notice of the strong performance of mid-caps, and small caps too, and considering how to gain exposure in their portfolios.”