I believe it was the legendary darts commentator Sid Waddell who coined the phrase “the biggest comeback since Lazarus” — it has felt a bit like that for the recovery in UK equities last year.
With a 21.5% return in 2025, the blue-chip index produced its best return since 2009 – as well as being one of the highest returns of any market last year*. It was a far cry from the start of 2025, when the UK’s “old economy” stocks like financials and mining were firmly cast to the side in favour of the AI-fuelled US growth names dominating markets.
2026 also started well – with the FTSE 100 passing the 10,000 mark at the start of the year. However, this has come amid a backdrop of UK equity funds continuing to suffer from the overhang of Brexit a decade ago – with some £71 billion of outflows from UK assets since 2016**.
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Sentiment and reality are two different things – while investors may have fallen out of love with UK equities, the larger companies within the FTSE 100 have actually done quite well. Based on forward price-to-earnings (used to gauge if a stock is expensive or cheap based on anticipated growth rather than historical performance), the FTSE 100 is trading at roughly 13-14x earnings, which although cheap compared to 20-25x in the US, is roughly in line with the historical averages for the blue-chip index***.
However, things have changed in recent weeks with heightened geopolitical uncertainty, and the UK is not immune, with rising energy prices set to weigh on both growth and inflation expectations. However, could a look further down the UK market-cap spectrum provide opportunities for investors to protect assets as well as grow them in the long term?
UK mid and small-caps remain extremely cheap relative to their own historical values. Persistent outflows and weak sentiment mean there should be plenty of value for patient investors who can access these domestically-focused, often cyclical names.
Sentiment has clearly been a challenge, but while UK investors – who have been the natural buyers of these assets – have chosen to hold fire, international investors have been steadily increasing their exposure as they recognise the attractiveness of valuations in the UK market and the earnings potential of individual companies. For example, around one-fifth of the FTSE 250 (UK mid-cap index) was acquired in 2025, indicating the strategic value that external buyers are finding in this market****.
UK mid and small-caps are already at bargain basement prices
UK small and mid-caps offer strong diversification benefits, at bargain basement valuations – FTSE 250 companies trade on half the valuation of those in the S&P 500, yet have the same estimated shareholder returns****. Some investors are looking for this type of investment profile to reduce volatility and enhance long-term performance.
Diversification and managing volatility are key points in any market – but particularly now given the geopolitical uncertainty caused by the US war with Iran. We’ve already started to see a rotation away from the expensive US mega-caps – you’d be hard pressed to find another equity asset which has as much diversification away from these tech behemoths in the developed world. These are proven assets with weak sentiment – but when they bounce back, they tend to bounce back hard. Take the end of the Global Financial Crisis as an example: between March and December 2009, the FTSE Small Cap Index rose more than 75%^.
UK mid and small-caps clearly have their challenges, most notably liquidity from the continued de-rating due to outflows, but many managers within these sectors would tell you this is a unique opportunity given how cheap many of their underlying holdings are.
Liontrust UK Micro-Cap lead manager Alex Game says headwinds facing the fund mean it is now an extremely attractive investment, pointing to multiples not seen for this segment of the market since the Global Financial Crisis, despite strong underlying fundamentals. For example, the fund is currently trading on a price-to-earnings (P/E) of 10.5x (18.1x is the average over the life of the fund)^^.
Alex says you cannot rule out further deterioration of the macroeconomic picture – with earnings coming under greater pressure – but says the margin for safety is fairly high given the already depressed valuations.
“The GFC was the worst-case scenario – and what we saw was earnings fall and a de-rating from a high to low point. Even if earnings were hit – which we do not see because all our businesses are well-capitalised and in growth markets – you won’t have the same downside from valuations. It is a really compelling case to buy into this attractive underlying compounding earnings and cashflow streams at valuations not seen for a very long time.”
The story is no different for UK mid-caps either. AXA Framlington UK Mid-Cap manager Chris St. John says not only is the FTSE 250 trading at a 20-year plus valuation low versus the FTSE 100, but the UK mid-cap index is trading at 32.9% discount to global equities on a forward P/E basis^^^. He says this has created a multi-year valuation opportunity for the sector with a compelling risk/reward scenario for duration.
Clearly investing further down the market-cap spectrum is not a smooth ride for investors, but it offers the potential for both growth and a degree of protection at a time when markets look expensive given the macroeconomic and geopolitical headwinds it faces.
In addition to those mentioned, here are three other funds investors may want to consider:
IFSL Marlborough Multi-Cap Growth – Manager Richard Hallett aims to invest in the UK’s leading growth businesses, regardless of size. He initially identifies long-term structural growth trends and then invests in the strongest market-leading businesses benefiting from them. Richard runs a much more concentrated portfolio of about 50 holdings (37% is currently held in mid and small-caps*^). He studiously analyses each company’s financial statements to truly understand each business. We think Richard is an excellent stock-picker and his long-term track record with this fund speaks for itself.
Jupiter UK Dynamic Equity – Alex Savvides and Stephanie Geary have a value-conscious style, seeking companies that have been beaten up by the market but are on the path to sustainable change (the average PE is currently 12.1x**^). Alex has provided some of the best long-term performance of any UK manager over the past two decades and we are confident he can continue in this vein. The fund is very much multi-cap in nature with a third currently held in mid and small-caps***^.
WS Raynar UK Smaller Companies – Managed by Philip Rodrigs, this UK smaller companies fund holds between 70-90 stocks. Philip’s bottom-up approach aims to balance high-conviction with diversification in this under-researched market. He favours firms with strong management teams and clear growth catalysts that are on attractive valuations. Philip has had great success prior to Raynar, working at both Investec and R&M.
