UK smaller companies: a focus on liquidity
CAPITAL AT RISK. All financial investments involve taking risk and the value of your investment may go down as well as up. This means your investment is not guaranteed and you may not get back as much as you put in. Any income from the investment is also likely to vary and cannot be guaranteed.
This is a marketing communication. Before making any final investment decisions, and to understand the investment risks involved, refer to the fund prospectus (or in the case of investment trusts, Investor Disclosure Document and Articles of Association), available in English, and KIID/KID, available in English and in your local language depending on local country registration, available in the literature library.
We define liquidity as the ability to buy and sell shares easily, and without affecting unduly the shares’ underlying price.
We recognise that we offer investors daily liquidity (the ability to buy and sell units in the Artemis UK Smaller Companies Fund every working day), while holding company shares which, in relation to normal daily trading volumes, do not necessarily trade every day.
So how do we think about it; how do we manage it; and do the rewards justify this liquidity risk?
Unquoted holdings
We hold a well-diversified portfolio of holdings – typically between 60 and 90 companies – with the largest holding never making up much more than 3% of the portfolio. Neither the Artemis UK Smaller Companies Fund or UK Future Leaders Trust hold unquoted stocks.
A broad investor base
The fund has been established for over 25 years; has not experienced a recent period of rapid inflows; and has a broad investor base – all of which help to reduce, though not of course to eliminate, the risk of a period of very rapid outflows.
A broad range of holdings
We diversify the fund’s holdings by size. Currently we have slightly less than 4%1 of the fund invested in ‘micro-cap’ companies1 (those whose market capitalisations are less than £100m).
That is given some balance by having approximately half of the fund in companies whose market capitalisations are more than £500m1.
A long-term view
We continue to run the fund with a long-term perspective: each investment decision is taken with a view to that company’s prospects over at least three to five years. Any investments in equities will be subject to volatility. We would expect our approach, favouring companies with strong balance sheets and good cash generation, to help to lessen this volatility over time.
Strong governance
Added to the above, the fund benefits from Artemis’ robust framework for governance. It includes an investment risk team, reporting to Artemis’ Chief Risk Officer and responsible for monitoring the liquidity profile of the fund. It is there to ensure that potential redemptions (investors seeking to sell their investments in the fund) can be handled adequately; and within the principle of TCF (Treating Customers Fairly).
Do the rewards justify this liquidity risk?
To the final part of the question – ‘do the rewards justify this liquidity risk?’ From a historical perspective, the answer is ‘yes’ – in spades.
Over the last 60 years, the UK’s smaller companies have outperformed large-cap companies (the FTSE 100 Index) by 3.1% per annum**. The smallest companies – ‘micro-caps’ – have performed even better, outperforming large-cap stocks by 7% per annum2.
Optimising the prospects of capturing the ‘small-cap premium’, and further mitigating the liquidity risk, requires a long-term approach – from us and our clients.
Notes and references
- Source Artemis as at 31 March 2025
- Source Deutsche Numis Indices: 2024 Annual Review by Scott Evans and Paul Marsh
Risks specific to Artemis UK Smaller Companies Fund
- Market volatility risk The value of the fund and any income from it can fall or rise because of movements in stockmarkets, currencies and interest rates, each of which can move irrationally and be affected unpredictably by diverse factors, including political and economic events.
- Currency risk The fund’s assets may be priced in currencies other than the fund base currency. Changes in currency exchange rates can therefore affect the fund's value.
- Charges from capital risk Where charges are taken wholly or partly out of a fund's capital, distributable income may be increased at the expense of capital, which may constrain or erode capital growth.
- Smaller companies risk Investing in small companies can involve more risk than investing in larger, more established companies. Shares in smaller companies may not be as easy to sell, which can cause difficulty in valuing those shares.
Risks specific to Artemis UK Future Leaders plc
- Market volatility risk The net asset value of the trust, and the income it receives from its investments, can rise and fall because of movements in stockmarkets, currencies and interest rates, each of which can move irrationally and be affected unpredictably by diverse factors, including political and economic events.
- Currency risk The trust’s assets may be priced in currencies other than the trust base currency. Changes in currency exchange rates can therefore affect the trust's value.
- Derivatives risk The trust may invest in derivatives with the aim of profiting from falling (‘shorting’) as well as rising prices. Should the asset’s value vary in an unexpected way, the trust value could reduce.
- Leverage risk The trust may operate with a significant amount of leverage. Leverage occurs when the economic exposure created by the use of derivatives is greater than the amount invested. A leveraged portfolio may result in large fluctuations in its value and therefore entails a high degree of risk including the risk that losses may be substantial.
- Charges from capital risk Where charges are taken wholly or partly out of a trust's capital, distributable income may be increased at the expense of capital, which may constrain or erode capital growth.
- Smaller companies risk Investing in small companies can involve more risk than investing in larger, more established companies. Shares in smaller companies may not be as easy to sell, which can cause difficulty in valuing those shares.
- Income risk The payment of income and its level is not guaranteed.
Important information
The intention of Artemis’ ‘investment insights’ articles is to present objective news, information, data and guidance on finance topics drawn from a diverse collection of sources. Content is not intended to provide tax, legal, insurance or investment advice and should not be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security or investment by Artemis or any third-party. Potential investors should consider the need for independent financial advice. Any research or analysis has been procured by Artemis for its own use and may be acted on in that connection. The contents of articles are based on sources of information believed to be reliable; however, save to the extent required by applicable law or regulations, no guarantee, warranty or representation is given as to its accuracy or completeness. Any forward-looking statements are based on Artemis’ current opinions, expectations and projections. Articles are provided to you only incidentally, and any opinions expressed are subject to change without notice. The source for all data is Artemis, unless stated otherwise. The value of an investment, and any income from it, can fall as well as rise as a result of market and currency fluctuations and you may not get back the amount originally invested.
