Smaller companies have been the place to be invested over the past three years, according to new data from Chelsea Financial Services.
Funds in the Investment Association's Smaller companies, European smaller companies, Japanese and North American smaller companies sectors returned more to investors than any of the other 26 sectors over that time period.
According to Chelsea's RedZone report, which lists funds reporting only third- or fourth-quartile returns every year for the past three years up to 1 September 2015, those four sectors all returned more on average than 50 per cent to investors, with IA UK Smaller Companies returning 62 per cent.
While sectors such as emerging markets lost investors money, putting money into managers able to choose the most nimble smaller companies has paid off well, with the best funds delivering returns of over 100 per cent.
Woodstreet Micro Cap Investment (GB00B55S9X98), a UK small-cap equity fund was the third-best performing fund on Chelsea's list, delivering 115 per cent in the three years to 1 September 2015. It was beaten by Legg Mason IF Japan Equity (GB0033507467) and Legg Mason Opportunity (IE00B3FHN298). However, Chelsea's worst-performing fund was also a smaller companies fund. The SF Webb Capital Smaller Companies Growth fund (GB00B28R5W35) underperformed by 88 per cent.
Smaller companies funds have had a good run, which would normally indicate a period of underperformance is due. But because they are more plugged into the domestic economy they could also prove a place to shelter if global markets continue to sink. Slowing growth in China and nervousness around the timing of a US interest rate hike sent markets falling around the world, with global equities experiencing their worst results since 2011.
By contrast, smaller-cap indices have held up well on relative terms. In one year the FTSE Small Cap has returned 4.4 per cent compared with a 7.8 per cent fall for the FTSE 100 and in six months it has lost just 1.46 per cent while the FTSE 100 has dropped by over 12 per cent.
Over three years the two worst-performing sectors were in emerging markets, which lost investors money. The IA Global Emerging Markets sector fell by 4.9 per cent over three years while the IA Global Emerging Market Bond sector fell by 7.6 per cent.
