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

This article is provided for information only. The views of the author and any people quoted are their own and do not constitute financial advice. The content is not intended to be a personal recommendation to buy or sell any fund or trust, or to adopt a particular investment strategy. 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. Past performance is not a reliable guide to future returns. Market and exchange-rate movements may cause the value of investments to go down as well as up. Yields will fluctuate and so income from investments is variable and not guaranteed. You may not get back the amount originally invested. Tax treatment depends of your individual circumstances and may be subject to change in the future. If you are unsure about the suitability of any investment you should seek professional advice. Whilst FundCalibre provides product information, guidance and fund research we cannot know which of these products or funds, if any, are suitable for your particular circumstances and must leave that judgement to you. Before you make any investment decision, make sure you’re comfortable and fully understand the risks. Further information can be found on Elite Rated funds by simply clicking on the name highlighted in the article.