With investors remaining cautious of UK small and mid-caps, Richard Bullas, a specialist investment manager at Martin Currie, discusses why there have been such pronounced drawdowns as well as the outlook for 2023. 

After a disastrous year for UK small and mid-caps in 2022, Richard Bullas, co-head of strategy, UK Equity, at Martin Currie is optimistic about investment opportunities in 2023.    

Speaking at a media roundtable in London this month, Bullas said 2022 was a time when UK small and mid-caps were heavily out of favour: “It was one of the worst times on record, with the underperformance of the mid-cap index versus the FTSE 100 Index." 

“There has been a huge amount of nervousness around UK domestic firms, amidst high inflation levels and rising interest rates. We don’t have big oil stocks, for instance. in the mid-cap index. In the mid-cap index, there is a greater weighting to retailers, industrial firms and to consumer names like leisure and travel, all sectors that have been sold off due to the challenging environment,” he continued.   

But Bullas believes that valuations are now looking very attractive in the mid-cap index. “The mid-cap index increased by 25 per cent after the October lows caused by the mini-budget. Stability is returning after the worst-case scenarios predicted in September/October haven’t come to pass. We also didn’t see the big spike in unemployment that was a big concern,” he said. 

He thinks that there are some good quality firms now to be found in the small to mid-cap range. “Prices are looking attractive and valuations and return expectations are looking good. Inflation and interest rates are also starting to peak,” he said. 

Nevertheless, if the macroeconomic situation worsens and central banks overtighten monetary policy, he said that there is a risk. For now, he believes that it’s looking like a manageable economic slowdown. 

FTF Martin Currie UK Mid-Cap Fund
Bullas manages the FTF Martin Currie UK Mid-Cap Fund where the investment strategy is to create a high-conviction portfolio of undervalued companies by investing in the constituents of the FTSE 250 (ex-ITs) Index. It invests in robust, quality businesses, with around 30 to 50 holdings over the longer-term. 

They are overweight relative to the FTSE 250 (ex-ITs) Index in industrial support services, telecommunications equipment and household goods and home construction. They are underweight in banks, travel and leisure, pharmaceuticals and real estates. 

The top 10 holdings include Spirent Communications, Cranswick Foods and Grainger Property Rentals. Bullas said that during the volatile period, they added to 18 of their holdings, including kitchen specialist Howdens, instead of adding new names. 

They also sold Wetherspoons as they don’t believe the company has the growth opportunities they want to see, believing that it will struggle to reach pre-Covid levels. Post-Covid, older people are not going out so much whilst younger people are looking to spend a bit more, Bullas said. 

Martin Currie runs around £17 billion ($20 billion) in assets, and is a specialist investment manager of Franklin Templeton, a global asset manager with  AUM of $1.3 trillion.