Investing in smaller companies is often considered more risky, but there are diversification benefits they can bring to your client portfolios.
But where do you start in looking at this sector? Our how-to guide covers the basics.
1. Are you suited to small- or large-cap funds? Be prepared that smaller companies tend to carry more risk and volatility than large-caps. The FTSE Small-Cap index saw similar losses in 2008 to the FTSE 100, but small-caps have had a less volatile recovery.
2. How global is the fund? Many UK smaller company funds are now very global. They invest heavily in companies with a large global presence. If you want a largely UK-based fund, look into the fund’s allocation.
3. What is the management fee? Always check what the management fee or initial charge will be on a fund. It may be that an investment trust with a similar strategy and asset allocation may work out cheaper for your client.
4. Could you do it yourself? Now Aim shares are available on Isas, look to see if it is possible to create your own portfolio using shares instead of funds. It may bypass some management fees. Consult the latest MM investment insight on smaller companies for more information.
5. What is the fund’s strategy? While it is a small sector, there are diverse options. It is important to look into these before investing to find the best match for you or your client.
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