The City is abuzz with the little miracles that could double your money
Small caps are riskier than large caps – but they can provide rapid growth Russ Mould
02 February 2026 6:00am GMT
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Questor, The Telegraph’s investing column, takes a weekly view of the markets – what is moving them, what lies ahead and how all of this could affect your portfolios and financial goals.
The FTSE 100’s gallop to new all-time highs last month continues to be a source of surprise to many.
Sceptics of the UK equity market’s prospects may be even more bewildered to learn that the mid-cap FTSE 250, FTSE Small Cap and FTSE Aim All-Share indices all stand at a one-year peak.
The Small Cap index actually stands at its highest-ever mark and the FTSE 250 is within 5pc of its 2021 zenith.
This phenomenon is not unique to the UK, either. America’s broad small-cap index, the Russell 2000, is setting new highs. In the year to date, it is also handily outperforming the mega-cap S&P 500 equity benchmark.
This is prompting active discussion among London’s strategists, analysts and investors as to whether mid-cap and particularly small-cap stocks are about to return to favour after a long, long time in the wilderness.
Small world
There can be no denying that small caps are riskier than large caps. They tend to be more reliant upon a narrower geographic sales base, offer a more limited range of products or services and perhaps employ only one or two key executives.
Problems with any of them can lead to trouble – especially for early-stage firms, which may have relatively limited amounts of capital with which to operate. They may be yet to generate profits or even sales, so early are they in their development.
Some of this helps to explain the indices’ relative performance.
The FTSE 100’s strong total returns can be ascribed to its broader, global nature since around two thirds of its profits are earned overseas. Equally, their greater exposure to the torpid UK economy is a ready excuse for the lesser returns offered by London’s mid-cap and small-cap names.
This can be seen even further down the market cap spectrum – as evidenced by the FTSE Aim All-Share, which is still nowhere near its peaks of 2021 and 2006, let alone the all-time high of 2000.
Equally, small caps can provide rapid growth and they may start to surprise on the upside if some risk appetite returns to the London market, interest rates continue to fall, the UK economy shakes off its torpor or all three.
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Moreover, unloved can also mean undervalued.
Big returns
Research from the TM Oberon UK Smaller Companies fund shows that the underperformance of small caps relative to large caps has been twice as bad as normal downturns. The Aim has lagged the FTSE 100 by 80 percentage points and the duration of that underperformance is twice as long as historic averages at four years, not two.
Even more intriguingly, previous small-cap bear markets – in 2000 to 2003, 2007 to 2009 and 2020 to 2021 – set up patient, contrarian, risk-tolerant investors for mighty returns once the recovery finally came.
Oberon’s data shows that after an 81pc drop as the dotcom bubble burst, Aim stocks then recorded a 135pc recovery. A 71pc plunge during the financial crisis was followed by a rebound of 159pc.
The Covid-led 40pc drop in Aim led into a 123pc rally. On each occasion, Aim beat large caps hands down.
We must all accept that the past is no guarantee for the future and many investors will despair of both the UK economy and the London market after a difficult period for both.
Optimists will counter that it is the darkest hour before the dawn and, more empirically, Oberon notes that the UK has produced more companies whose share price has risen thirtyfold than the US in the past three decades, while 23 stocks have surged by more than 100 times in the past 25 years (and that excludes commodity producers).
With those names, the trick was to buy during a period of disinterest in small caps, if not outright distress among them.
The average market capitalisation of the 100-baggers was just £14m at the start of their journey and none had a valuation of more than £100m before their meteoric rise began.
Fresh perspective
With around a third of all Aim stocks down by 80pc or more in absolute terms since Sep 2021, there is a good chance that there are some undiscovered nuggets of value out there.
Fund managers can do the legwork of stock selection, in return for their fees – or investors can take on that task themselves, providing they have a clear checklist to define what they are looking for and that small caps fit into the sort of diversified portfolio that meets an individual’s overall strategy, time horizon, target returns and appetite for risk.
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