How to invest in the FTSE 250

Laith Khalaf
8 April 2021

•    The FTSE 250 has hit a record high
•    Midcaps are not just a flash in the pan, the FTSE 250 has turned £10,000 into £62,859 over 20 years, comfortably beating the FTSE 100 and the S&P 500
•    The FTSE Small Cap Index is also at a record high
•    The FTSE 250 isn’t a pure barometer of the UK economy
•    Mid cap and small cap funds for investors

Laith Khalaf, financial analyst at AJ Bell, comments:

“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.

“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.”

UK index performance compared

   

Total return %

 
 

2021 YTD

10 years

20 years

FTSE 100

6.7

65.4

151.8

FTSE 250

7.7

143.8

528.6

FTSE All Share

7.1

78.3

189.6

FTSE Small Cap

11.5

178.0

314.0

S&P 500

7.3

314.4

393.9

Source: FE Total Return to 06/04/2020 in GBP

 

£10,000 invested

 

2021 YTD

10 years

20 years

FTSE 100

£10,672

£16,536

£25,181

FTSE 250

£10,773

£24,382

£62,859

FTSE All Share

£10,706

£17,828

£28,956

FTSE Small Cap

£11,153

£27,801

£41,395

S&P 500

£10,726

£41,443

£49,389

Source: FE Total Return to 06/04/2020 in GBP

Mid cap and small cap funds for investors

There aren’t too many funds which offer exposure dedicated to medium sized companies, and there is no mid cap sector, with funds plying their trade in this area falling into the broader Investment Association UK All Companies sector. Two funds which do give focused exposure are:

Franklin UK Mid Cap
Fund manager Richard Bullas runs a concentrated portfolio of 30 to 40 medium-sized companies he’s identified as having quality finances, but which are trading at attractive valuations, with a particular emphasis on cash flows.

Vanguard FTSE 250 ETF 
A fund which does just what it says on the tin. With an annual charge of just 0.1%, this ETF offers investors a cheap and cheerful way to gain exposure to the UK’s medium-sized companies.

Smaller companies funds are more plentiful, meriting their own sector with both the IA (funds) and the AIC (investment trusts). Two funds for consideration are:

TB Amati UK Smaller Companies 
Dr Paul Jourdan has been running this fund for over twenty years and the whole team is steeped in experience when it comes to small cap investing. They look for high quality companies with competitive advantages. They have an emphasis on the AIM market, but they can invest in stocks all the way up to the FTSE 250.

Standard Life UK Smaller Companies trust
Fund manager Harry Nimmo has been running this trust since 1993. He wants to invest in tomorrow’s largest companies today, and so runs a concentrated portfolio of smaller companies with good growth prospects and robust finances, so they can weather the occasional storm.

Laith Khalaf
Financial Analyst

Laith Khalaf started his career in 2001, after studying philosophy at Cambridge University. He’s worked in a variety of roles across pensions and investments, covering both the DIY and the advised sides of the business. In 2007, he began to focus on research and analysis, and has since become a leading industry commentator, as well as a regular contributor to the financial pages of the national press. He’s a frequent guest on TV and radio, and for several years provided daily business bulletins on LBC.

Contact details

Mobile: 07936 963 267
Email: laith.khalaf@ajbell.co.uk

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