Gervais Williams: UK market to outperform for 10 or 20 years

TL;DR

Diverse Income Investment Trust manager discusses the advantages of investing in UK smaller companies, which have historically outperformed large companies during recessions and offer potential for premium returns.

Transcript

hello and welcome to our latest Insider interview today in the studio I have with me Javas Williams for manager of the diverse income Investment Trust jaas thanks for coming in today it's a pleasure to be here the diverse income trust that invests across the UK Market but a particular preference for UK smaller companies given that UK smaller compan... Read More

Key Insights

• 🛩️ Smaller companies have historically outperformed large companies during recessions, as they can seize market share and expand into vacant areas.
• 🛩️ The UK Market, including smaller companies, is currently undervalued, offering potential for future growth.
• 🥺 The government incentivizing investment in UK quoted companies could lead to a catch-up in small company valuations.
• 🛄 The trust does not currently utilize gearing (borrowing), as it aims to avoid the risk of being caught out by market downturns.
• 🔒 Private companies staying private for longer makes the job of investing in small caps more challenging, but there are still ample opportunities in the UK Market.

Questions & Answers

Q: Why do smaller companies have an advantage over larger companies during recessions?

Smaller companies are often more agile and can quickly adapt to market changes, allowing them to seize opportunities and gain market share when competitors go out of business. They can also acquire insolvent but viable businesses for a nominal sum, generating a disproportionate amount of cash.

Q: Will the UK economy entering a recession in 2024 affect the performance of smaller companies?

While a recession may pose challenges for all businesses, smaller companies have historically performed well during economic downturns. The trust believes that even in a recession, smaller companies can thrive by capitalizing on market weaknesses and expanding into vacant areas left by failed competitors.

Q: How do valuations of the UK Market and smaller companies compare to historical levels?

Valuations of the UK Market, including smaller companies, are currently low compared to historical levels. The Price to Book ratio for the FTSE 100 is around 1.6-1.7, while the S&P 500 is around 4.2. This suggests that the UK Market, especially smaller companies, has significant potential for growth.

Q: How long do investors need to wait for outperformance in the mid and small cap part of the market?

The timing of outperformance is uncertain, but history has shown that small caps can see significant gains in a short period. The catalyst for outperformance can come unexpectedly, such as the pandemic, which led to a period of strong performance for small caps.

Summary & Key Takeaways

• The Diverse Income Investment Trust focuses on investing in UK smaller companies, which have a track record of outperforming large companies, particularly during recessions.

• Smaller companies can seize market share from struggling competitors and take advantage of vacant market areas during economic downturns.

• The trust believes that the smaller company sector has the potential to generate premium returns and outperform the mainstream FTSE 100 companies for the next 10-20 years.