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The UK equity market is one of the most diverse stock markets in the world. Historically smaller companies have tended to outperform their larger brethren, particularly when taking a medium-term investment horizon (Figure 1). We see a number of reasons for this. Smaller businesses tend to be less well researched by the market, leaving room to discover genuinely undervalued stocks. Small-caps also often have a high proportion of founder ownership, which encourages management to focus on long-term shareholder value creation. And, smaller companies are typically more nimble, allowing them to exploit niches in existing industries and generate organic growth.
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