Making sense of the small-cap 'reject bin'

Jonathan Winton, co-portfolio manager of the Fidelity UK Smaller Companies fund, explains why under-researched stocks allow managers to look ahead for changes the wider market is likely to miss.

With the bottom 10% of the UK small-cap market (by capitalisation) representing just over 1,800 companies (including AIM-listings), it is easy to assume each manager holds a different portfolio to their competitors. In reality, however, it is not unusual to see the same companies showing up across many portfolios.  This is partly explained by the fact many managers have a similar growth-orientated investment style, drawing them to the most compelling opportunities for high earnings growth over the long term. Market participants have to choose how to allocate limited research resources am...