Your IndustryAug 28 2014

What role should smaller companies play in a portfolio?

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James Dalby, market intelligence manager of Aviva, says there is significant value to be found in UK smaller companies and therefore good scope for growth in fund values.

He says: “In a growth portfolio it is about holding the right weighting of UK Smaller Companies.

“Advisers will know that many other funds that aren’t smaller company specific will still have a weighting to smaller companies. So establishing a customer’s overall weighting using an ‘x-ray’ type tool is important.”

Catherine Stanley, manager of the F&C UK Smaller Companies fund, says investors contemplating these funds should be those seeking scope for meaningful capital growth.

She says potential investors should be willing to invest on a medium to long-term time horizon and be able to accept the higher levels of volatility that are often associated with small-cap investment.

As with any investment decision, Ms Stanley says due consideration needs to be given to the investor’s overall attitude towards risk, their capacity for loss and the composition of their broader investment portfolio.

She says: “Given the long-term outperformance small caps have historically enjoyed over their larger counterparts they can play an important role in enhancing a portfolio’s performance potential.

“Consideration needs to be given to their other characteristics, however. Shares in smaller companies can be more volatile than those of larger companies, for example.”

As smaller companies funds are generally more exposed to economic conditions and changes in the stock market, Steve Kenny, head of retail sales at Kames Capital, says they are, broadly speaking, more suited to investors with a higher risk tolerance and a longer-term investment horizon.

If investors want to increase their exposure to the UK domestic economy, Mr Kenny says smaller companies funds can be a good option.

But he says they can suffer badly in market downturns, so are less appropriate for shorter-term, risk-averse investors.

Mr Kenny says: “If an investor has a high risk tolerance, a longer investment timeframe and a desire to grow their capital, a smaller companies fund could form a significant part of a portfolio.

“But if their tolerance for risk is lower, their timeframe shorter and their objective more to preserve capital than grow it, a smaller companies fund might not be appropriate.”