Small can be beautiful but may not be reliable

Many smaller companies funds have lately enjoyed spectacular performance but can they maintain this success?

ISA investors who ignored the major players and invested their money in smaller UK companies over the last 18 months, will have learned that small can be beautiful.

ISA investors who ignored the major players and invested their money in smaller UK companies over the last 18 months, will have learned that small can be beautiful.

Smaller company funds have lately delivered the sort of growth you used to expect from the FTSE 100. The sector performed strongly in 1999 and the first three months of this year. During this time some funds doubled in value.

This success was partly because many small companies are young, expanding computer software and internet businesses, and benefited from the soaring valuation put on technology stocks up to March 2000.

Some inevitably struggled after tech stocks dipped in April, but over the last 12 months many investment funds specialising in smaller companies have nevertheless enjoyed spectacular performance.

Artemis UK Smaller Companies fund grew 183 per cent and Gartmore UK & Irish Smaller Companies 100 per cent over the 12 months to September 18, according to Micropal. Many other smaller company funds available to ISA investors have performed strongly (see table).

Craig Wetton, chief executive at Chartwell Investment Management, says smaller companies fell out of favour in the late 1990s as blue-chip FTSE 100 companies stormed ahead. "Even some fantastic small companies used to struggle to get investment because the sector was unfashionable. Share prices were often low and did not reflect the true value of many companies, but that has now changed. Now it is the bigger companies that are considered undervalued," he says.

Smaller companies may not suit investors who want a steady, reliable return. "If there is a major stock market correction smaller companies will be among the first to suffer. They may have brought nothing to market or have little track record, and will lose out when investors get nervous. They will also be the last to recover when the economy picks up," Mr Wetton says.

Another reason for their volatility is their heavy bias towards technology. Although few doubt that in the long term technology companies are set to deliver excellent growth, in the short term the going will get sticky at times, and some companies will fall by the wayside.

Mr Wetton's preferred funds include Britannic Smaller Companies, which grew 81 per cent over the last three years, and BWD UK Smaller Companies, which managed a storming 190 per cent over the same period. He also warms to Henderson UK Smaller Companies and Schroder UK Smaller Companies, which grew 155 per cent and 120 per cent respectively over the last three years.

John Beale, investment expert at discount house TQ Direct Choice, is confident smaller companies can maintain their recent success. "The sector has caught up dramatically with larger companies, and there is no reason why it should not sustain its current impressive performance."

He also recommends the BWD fund, "a top quartile fund over one, three and five years". For investors interested in slightly larger companies, he recommends the Dresdner RCM UK Mid Cap, which invests in the 250 largest companies outside the FTSE 100.

James Dalby, investment adviser at Bates Investment Services, warns ISA investors that while smaller companies may be enjoying their day in the sun today, larger companies may have their turn tomorrow. "You should be looking to build a balanced portfolio covering a range of sectors."

He says investors with larger portfolios should not restrict themselves to UK smaller companies and suggests European smaller companies as a good place to start, particularly Invesco GT European Growth, which grew 209 per cent over the last three years.

Mr Dalby adds: "The US is the world's largest market and although companies are not cheaply valued there are so many opportunities that a good active fund manager will find some real gems." He recommends Henderson American Smaller Companies, which has grown 124 per cent over the last three years. For a smaller companies ISA with an international flavour he recommends investment trust Henderson Strata by Henderson Investors.

Some Japanese smaller companies funds have performed well recently, but Mr Dalby says: "I would stay away from Japan unless you are really well represented in other areas. There is a recovery underway but it is very fragile."

To underline his point, Threadneedle Japan Smaller Companies grew 219 per cent over the last two years, but little of that growth came in the last 12 months, when it managed just 7.5 per cent.

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

Arts and Entertainment
TV Review: Sabotage, a meltdown and, of course, plenty of sauce
News
newsVideo for No campaign was meant to get women voting
News
A photo of Charles Belk being detained by police on Friday 22 August
news
News
i100'Geography can be tough'
PROMOTED VIDEO
Sport
Louis van Gaal looks dejected after Manchester United's 4-0 defeat by MK Dons on Tuesday night
sport
News
Actor, model and now record breaker: Jiff the Pomeranian
Video
News
REX/Eye Candy
science
News
i100
News
Down time: an employee of Google uses the slide to get to the canteen
scienceBosses are inventing surprising ways of making us work harder
Sport
Alexis Sanchez celebrates after scoring his first goal for Arsenal in the Champions League qualifier against Besiktas
sportChilean's first goal for the club secures place in draw for Champions League group stages
Arts and Entertainment
Amis: 'The racial situation in the US is as bad as it’s been since the Civil War'
booksAuthor says he might come back across Atlantic after all
Extras
indybest
Life and Style
Google Doodle celebrates the 200th birthday of Irish writer Sheridan Le Fanu
tech
Arts and Entertainment
Vinyl demand: a factory making the old-style discs
musicManufacturers are struggling to keep up with the resurgence in vinyl
News
i100
News
In Eternal Sunshine of the Spotless Mind Jim Carrey and Kate Winslett medically erase each other from their memories
scienceTechnique successfully used to ‘reverse’ bad memories in rodents could be used on trauma victims
Arts and Entertainment
Singer Pixie Lott will take part in Strictly Come Dancing 2014, the BBC has confirmed
tv
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    C# Developer (C#, ASP.NET Developer, SQL, MVC, WPF, Real-Time F

    £40000 - £48000 per annum + benefits+bonus+package: Harrington Starr: C# Devel...

    C# Swift Payment Developer (C#, ASP.NET, .NET, MVC, Authorize.N

    £45000 - £60000 per annum + benefits+bonus+package: Harrington Starr: C# Swift...

    DevOps Engineer - Linux, Shell, Bash, Solaris, UNIX, Salt-Stack

    Negotiable: Harrington Starr: A fast growing Financial Services organisation b...

    Trade Desk FIX Analyst - (FIX, SQL, Equities, Support)

    £50000 - £60000 per annum + excellent benefits: Harrington Starr: An award-win...

    Day In a Page

    Israel-Gaza conflict: No victory for Israel despite weeks of death and devastation

    Robert Fisk: No victory for Israel despite weeks of devastation

    Palestinians have won: they are still in Gaza, and Hamas is still there
    Mary Beard writes character reference for Twitter troll who called her a 'slut'

    Unlikely friends: Mary Beard and the troll who called her a ‘filthy old slut’

    The Cambridge University classicist even wrote the student a character reference
    America’s new apartheid: Prosperous white districts are choosing to break away from black cities and go it alone

    America’s new apartheid

    Prosperous white districts are choosing to break away from black cities and go it alone
    Amazon is buying Twitch for £600m - but why do people want to watch others playing Xbox?

    What is the appeal of Twitch?

    Amazon is buying the video-game-themed online streaming site for £600m - but why do people want to watch others playing Xbox?
    Tip-tapping typewriters, ripe pongs and slides in the office: Bosses are inventing surprising ways of making us work harder

    How bosses are making us work harder

    As it is revealed that one newspaper office pumps out the sound of typewriters to increase productivity, Gillian Orr explores the other devices designed to motivate staff
    Manufacturers are struggling to keep up with the resurgence in vinyl records

    Hard pressed: Resurgence in vinyl records

    As the resurgence in vinyl records continues, manufacturers and their outdated machinery are struggling to keep up with the demand
    Tony Jordan: 'I turned down the chance to research Charles Dickens for a TV series nine times ... then I found a kindred spirit'

    A tale of two writers

    Offered the chance to research Charles Dickens for a TV series, Tony Jordan turned it down. Nine times. The man behind EastEnders and Life on Mars didn’t feel right for the job. Finally, he gave in - and found an unexpected kindred spirit
    Could a later start to the school day be the most useful educational reform of all?

    Should pupils get a lie in?

    Doctors want a later start to the school day so that pupils can sleep later. Not because teenagers are lazy, explains Simon Usborne - it's all down to their circadian rhythms
    Prepare for Jewish jokes – as Jewish comedians get their own festival

    Prepare for Jewish jokes...

    ... as Jewish comedians get their own festival
    SJ Watson: 'I still can't quite believe that Before I Go to Sleep started in my head'

    A dream come true for SJ Watson

    Watson was working part time in the NHS when his debut novel, Before I Go to Sleep, became a bestseller. Now it's a Hollywood movie, too. Here he recalls the whirlwind journey from children’s ward to A-list film set
    10 best cycling bags for commuters

    10 best cycling bags for commuters

    Gear up for next week’s National Cycle to Work day with one of these practical backpacks and messenger bags
    Paul Scholes: Three at the back isn’t working yet but given time I’m hopeful Louis van Gaal can rebuild Manchester United

    Paul Scholes column

    Three at the back isn’t working yet but given time I’m hopeful Louis van Gaal can rebuild Manchester United
    Kate Bush, Hammersmith Apollo music review: A preamble, then a coup de théâtre - and suddenly the long wait felt worth it

    Kate Bush shows a voice untroubled by time

    A preamble, then a coup de théâtre - and suddenly the long wait felt worth it
    Robot sheepdog technology could be used to save people from burning buildings

    The science of herding is cracked

    Mathematical model would allow robots to be programmed to control crowds and save people from burning buildings
    Tyrant: Is the world ready for a Middle Eastern 'Dallas'?

    This tyrant doesn’t rule

    It’s billed as a Middle Eastern ‘Dallas’, so why does Fox’s new drama have a white British star?