Investors who have piled into large-cap defensives and emerging markets this year have missed opportunities right under their noses among UK and European smaller companies. UK Smaller companies and European Smaller Companies have been the two top performing Investment Management Association (IMA) fund sectors in the year to date, with respective growth of 13.1 and 10.97 per cent.
"Many investors are focusing on large-cap defensive stocks so mid- and small-cap markets have been unjustly undervalued," said Danny Cox, head of advice at Hargreaves Lansdown. "Well run smaller companies continue to navigate the difficult economic conditions successfully despite being under the radar of many investors and this presents buying opportunities. Notably the performance of the European Smaller Companies sector shows companies can thrive in even the toughest of economic environments. Investors often look to emerging markets in search of high growth and risk missing the opportunities on their doorstep where good corporate governance and regulation can give added reassurance."
The IMA Technology & Telcoms sector has also performed well year to date, returning 9.87 per cent.
UK smaller companies and mid-cap funds dominate the list of top 10 funds year to date (see below), with the AXA Framlington Biotech Fund in particular having a good year.
Read more on Big Profits From Global Healthcare
When a sector has rallied there is always a concern that it has had its run. But Mr Cox adds:
"Smaller companies will always be a volatile area and the prospects for the UK economy remain anaemic at best, but there will continue to be success stories out there. Stock picking is incredibly important in the UK smaller companies sector and the key is to be with the right managers, such as Giles Hargreave who runs (IC Top 100 Fund) Marlborough UK Micro Cap or Daniel Nickols who runs Old Mutual UK Select Smaller Companies Fund."
Read our tip on Marlborough UK Micro Cap
Top performing funds year to date
| Fund | Growth (%) | Fund sector |
| Neptune UK Mid Cap A Acc GBP | 28.33 | UK All Companies |
| AXA Framlington Biotech R Acc | 26.93 | Specialist |
| MFM CFS Balanced Opportunities A Inc | 26.61 | Flexible Investment |
| Fidelity UK Smaller Companies A Acc | 22.92 | UK Smaller Companies |
| CF Odey UK Absolute Return GBP R Acc | 22.56 | Absolute Return |
| Premier ConBrio Sanford Deland UK Buffettology | 22.51 | UK All Companies |
| JPM Europe Convergence Equity A Dis EUR | 22.05 | Specialist |
| Henderson UK Smaller Companies A Net Acc | 21.86 | UK Smaller Companies |
| Baillie Gifford British Smaller Companies A Acc | 21.44 | UK Smaller Companies |
| Schroder UK Mid 250 Inc | 20.82 | UK All Companies |
Source: Hargreaves Lansdown/Lipper as at 31 August 2012
