By Polly Fergusson Smaller companies will not attract the attention of fund managers because of l...
By Polly Fergusson
Smaller companies will not attract the attention of fund managers because of liquidity concerns despite expectations that they will outperform the FTSE All-Share Index for the third consecutive year.
Findings from the fourth annual KPMG survey of UK fund manager sentiment towards UK Smaller Quoted companies shows that institutional investors remain the key source of funding for small companies.
But institutions are failing to invest in smaller companies, leading to lower valuations and a lack of access to reasonably priced funding.
Neil Austin, a partner at KPMG, said: "The problem is there is just not enough room in the market for these smaller companies
"There are 1,556 listed companies outside the FTSE 350 Index, but a lot of them shouldn't be there and the market needs to slim down."
The 1,556 companies listed on the Small Cap, Fledgling and Aim indices represent just 6% of total market cap of the All-Share Index, with an average market capitalisation of around £65m.
The lack of interest in smaller companies from fund managers is not expected to improve. At the same time the performance of stock markets around the world looks shaky and the government fails to provide additional incentives such as the tax breaks available on Aim stocks to invest in smaller companies.
Institutions are only interested in buying stock if they can buy and sell enough shares to make their investment worthwhile.
But for many smaller companies the lack of shares available to trade - the free float has put fund managers off.
There is some good news with more retail investors buying into the smaller stocks but only trading in small amounts, so not improving liquidity enough to lure fund managers.