Investing in smaller companies can provide superior returns when compared with the broader stock market.
A good example of this is the 60.7% return from the Hoare Govett Smaller Companies index in 2009 compared to 30.1% from the FTSE All Share index.
There is, however, a price to pay for this potential additional return.
The fact that fewer analysts cover companies at this end of the market means that the research costs are higher.
The size of some of the 500-600 companies in the target market can also lead to liquidity issues.
Dan Nickols, manager of the Old Mutual UK Select Smaller Companies fund, said “There are always liquidity constraints at this end of the market but we can also invest in companies that have a market cap of close to £1billion where this is less of a problem.”
Mr Nickols is confident that the fund is well placed despite the current economic backdrop.
He said: “It’s obvious that there are huge uncertainties regarding the global economy at the moment, but I’m as happy for people to invest in smaller companies as any other part of the market-cap spectrum due to the sheer diversity of the investment universe.
“There are plenty of opportunities at this end of the market.
“I’d like to think that we’re relatively well protected, regardless what happens in the general election. We’re underweight in areas reliant on the UK consumer and on UK Government spending like the support-service sector.
“It’s also worth emphasising the international nature of the portfolio.”
The fund holds in the region of 100 companies, with the largest holding currently accounting for 2.5% of the portfolio.
Mr Nickols is particularly keen on specialist polymer manufacturer Victrex.
He said: “The volumes for its main product are recovering strongly and analysts’ forecasts for the company are demonstrably too low.”
Mr Nickols’ fund has returned 74% over the last five years, compared with 24.7% from the sector average fund.
For more information about the Old Mutual UK Select Smaller Companies fund, you can visit website www.omam.co.uk or call 0808 100 8808.
Barry O’Neill is a chartered financial planner with Thomson Shepherd and can be contacted on 01224 619215