Smaller companies funds tend to come with an alluring sales pitch: it’s here that stockpicking managers can truly prove their worth, unearthing hidden gems overlooked by, or unknown to, the average investor. In reality, performance can be pretty mixed. The professionals, it turns out, often make mistakes just as easily as the inexperienced. And yet their shared wisdom can nonetheless prove a useful starting point for further investigation.
The good news is that small caps, collectively, have been doing well enough for a while now – depending on which index you look at. While the Aim benchmark has continued to struggle in the face of higher interest rates, the FTSE Small Cap (ex ITs) index narrowly beat its large and mid-cap peers last year and, after a shaky start to 2024, has since extended those gains. At the halfway point in the year, the benchmark had returned 8.2 per cent on a total return basis, compared with the FTSE 100’s 8.1 per cent and the 250’s 5.1 per cent return.
It's reasonable to think things may be about to improve further. The nascent UK economic recovery, coupled with the prospect of interest rate cuts later this year, is providing a more resilient foundation for these shares. But stockpickers will not be content to simply track the index: there are high-quality companies to be found in both the main market and on Aim, as we regularly highlight in the pages of Investors' Chronicle.