Fund managers were able to generate strong gains for investors by mirroring the index but then it all went wrong and since the turn of the century small and mid-cap stocks have been where the gains have been made.The FTSE 100 was just short of 7,000 on December 31, 1999 but then dramatically declined, deflated by the burst bubble of technology stocks, eventually bottoming out in March 2003 at about 3,000. Recent figures tell the story. The FTSE Mid 250 on a capital-return basis over the four-year period between August 10, 2001 to September 5, 2005 is up by 29.8 per cent but over the same term, the FTSE 100, on a capital-return basis, has fallen by 1.65 per cent. However, the value gap between small and mid-cap shares and FTSE 100 stocks has narrowed considerably and many investment professionals agree that the market today is more level and many believe the FTSE 100 could hit the 6,000 mark by the end of the year. The past two to three years have been dominated by mid and small-cap stocks, with phenomenal outperformance, says Credit Suisse Asset Management director, multi-manager fund of funds Gary Potter, but he now believes there is better value now in the FTSE 100. He says: “It is fair to say in the run-up to 2000/01, small caps had been left behind to an extent and were trading on significant discounts but this has changed dramatically.” Potter notes that CSAM, while not overweight in large caps, has been raising its commitment to the sector while maintaining its exposure to the best stockpickers. He adds: “Some stocks in the FTSE 100 are not that expensive but that does not mean that all of the FTSE 100 is cheap.” Bates senior investment adviser Paul Ilott feels there is more balance in the market spectrum. He admits that there are a lot of fund managers who are not necessarily moving into large caps but he says he has witnessed a migration of assets towards bigger companies. He says: “At the beginning of the year, fund managers were telling us there were better opportunities in large caps than there had been for a very long time. We are not necessarily expecting large caps per se to outperform the rest of the market as it is still down to good stockpicking. If you look at the sectors – oil, financials and pharmaceuticals – then in a number of cases, it is not obvious that there is value across the range.” Illot says some fund managers are telling him that large-cap pharmaceu- ticals are undervalued and telecommunications is another sector where fund managers are seeing better opportunities. Gartmore head of UK equities Jon Thornton says big companies are coming under the spotlight but says good stockpicking is still necessary. “All the market sectors, small, mid and large,are now quite reasonably priced. This year, small and large caps have performed broadly in line with each other, with the former having the edge in performance. But the FTSE Mid 250 is hitting all time highs. We are seeing more opportunities relative to mid/smaller than two years ago. The valuation gap between the two sectors has narrowed. We are not particularly aggressively balancing ourselves one way or the other but we are more biased towards smaller and mids,” he says. Thornton says the recent spate of merger and acquisition activity in the public and private sectors is telling in terms of what is happening in the large-cap arena. Some individual large caps are offering better opportunities than they have done in the past few years but it is not just a case of moving wholesale into large caps, more a case of selective stockpicking into quality growth stocks, says Ilott. He believes active management is still the way ahead and that investing into a tracker would not necessarily be recommended, especially as many fund managers are not shackled by the tight mandates they would have had years ago, giving them more scope to outperform.