The Hoare Govett Smaller Companies Index, which measures the companies in the bottom tenth of the stock market by value, rose 44 per cent during 1993, including reinvested dividends.
This is the highest total return since the 98 per cent rise registered in 1977.
That performance far outstripped the FT-SE 100 index, which ended the year 20.1 per cent higher than it started, or 25.2 per cent including dividends.
The FT-SE All Share, which plots the progress of the largest 800 or so companies, had a total return of 28.4 per cent.
John Houlihan, a director at Hoare Govett, said: 'Investors rediscovered their enthusiasm for smaller companies as the prospects for the domestic economy brightened. The smaller company effect reasserted itself with a vengeance.'
The inverse correlation between size of company and share price performance was confirmed by the fact that the smallest 1,000 companies did even better than the Hoare Govett index, which includes about 1,500 shares.
The smallest 1,000 ended the year 60 per cent higher on a total returns basis. The smallest 100, the most illiquid companies, did best of all, more than doubling on average.
The good showing by smaller companies marks a return to the long-term trend of outperformance by market tiddlers. In the 39 years covered by Hoare Govett's research, large companies have done better on average than small companies on only 11 occasions.
That has led to a huge cumulative difference in investment return between the sectors.
The value of pounds 1 invested in the Hoare Govett index in 1955 would have risen to pounds 800 by the end of last year, compared with pounds 193 for the same amount invested in the FT-SE All Share.
Looking ahead to 1994, Mr Houlihan predicted a further 20 per cent rise in the index and another year of outperformance by smaller companies. He thought shares would be driven by rising earnings from leaner companies, and especially rising dividends, which could jump by 10 per cent on average this year.
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