It is time to brave and invest in UK smaller companies?

February 2009 was a scary time for investors. In the aftermath of the global financial crisis, the stock market had been falling for some 18 months and we were in the midst of the deepest UK recession since the Second World War.

UK investors had seen the FTSE All Share fall by some 40% and the public in general was mistrustful of the financial services industry. The easy thing to do was keep savings in cash – even though interest rates had fallen from 5.25% to 1% over 12 months, and would fall further still.

But for those with long investment time horizons this would turn out to be a mistake.

Just 24 funds, out of some 2,000 with a ten year track record, have underperformed cash (which has returned just under 5%*) over the decade. 13 of these are cash-like funds. The others mainly those investing in oil or commodities.

Three-quarters of all funds available to UK investors over those ten years would have doubled your money, with returns of 100% or more. One-quarter returned more than 200%. 46 funds returned more than 400% – 16 of which were UK smaller companies funds.

And it’s this UK Smaller Companies sector that we focus on today. Investors who backed small British business in those scary times have been hugely rewarded. It is a classic lesson in ‘being brave when others are fearful’.

Easy to say, difficult to do. But those who had the discipline to follow this mantra have enjoyed average returns of 322.77%** since then. That’s more than 66 times the paltry 4.96%* investing in cash has returned. Even the worst UK smaller companies fund returned 152.10%***.

How Elite Rated UK Smaller Companies funds performed over the decade*

Fund NamePercentage returns over ten years***
Marlborough UK Micro Cap Growth515.70%
Liontrust UK Smaller Companies468.72%
Marlborough Special Situations441.79%
Merian UK Smaller Companies389.53%
Unicorn UK Smaller Companies385.69%
IA UK Smaller Companies sector average322.77%

Fast forward a decade and investors are once more fearful of the future for the UK economy and our stock market. The Bank of England has warned there is a one if four chance of recession – even if Brexit goes well – and international investors are choosing to put their money elsewhere.

So is this another moment to be brave and invest in the UK’s smallest companies? Could this be another opportunity for those long term investors who can afford to ride out the volatility?

Only time will tell, but we at FundCalibre are optimistic.

*Source: FE Analytics, total returns in sterling, 13 February 2009 to 13 February 2019 using the Bank of England base rate as a proxy for cash
**Source: FE Analytics, total returns in sterling, 13 February 2009 to 13 February 2019 using the IA UK Smaller Companies sector average
***Source: FE Analytics, total returns in sterling, 13 February 2009 to 13 February 2019

The views of the author and any people interviewed are their own and do not constitute financial advice. However the knowledge that professional analysts have analysed a fund or trust in depth before assigning them a rating can be a valuable additional filter for anyone looking to make their own decisions. Before you make any investment decision make sure you’re comfortable and fully understand the risks. If you invest in fund or trust make sure you know what specific risks they’re exposed to. Past performance is not a reliable guide to future returns. Remember all investments can fall in value as well as rise, so you could make a loss.