The average return from funds in the Investment Association (IA) UK All Companies sector over five years to February 10 is 26.1 per cent, while the UK Smaller Companies sector generated an average 53.3 per cent. In the past 12 months, as firms of all sizes have been battered by significant global volatility, the UK Smaller Companies sector has remained in positive territory, returning 4.4 per cent versus the 8.6 per cent average loss by UK All Companies vehicles.

Joanne Rands, co-manager of the Rathbone Recovery fund, says: “Smids had another strong year in 2015. While the FTSE 100 index fell 1.3 per cent, the FTSE 250 rose 11.2 per cent and the FTSE Small Cap (ex IT) increased 9.2 per cent. By the end of the year UK Smids were the best-performing asset class globally over five years.”

Noting the divergence of returns within UK equities, she says: “Tumbling commodity prices pulled down natural resources heavyweights, which are a cornerstone of the FTSE 100 index. Meanwhile, Smids were surfing a buoyant UK recovery – small-caps have triple the domestic exposure of FTSE 100 companies.”

Guy Anderson, portfolio manager of the Mercantile Investment Trust, says historically the evidence is even stronger, citing data going back to 1955.

The issue will be with the currency and the uncertainty because markets, as we know, hate uncertainty Richard Penny

“The Smid end of the UK market has outperformed in 41 out of those 61 years. Over that period the bottom 2 per cent of the market delivered a total return in excess of 11,000 per cent, compared with around 800 per cent for the FTSE All-Share index.”

He explains: “Smids tend to be more attractive from a merger and acquisition perspective, so they’re more likely to be targets than acquirers. But they also tend to be faster-growth companies and that’s clearly something the equity market rewards.”

Mr Anderson believes sector exposure also played a part in the outperformance of Smids last year. “The FTSE 100 is a concentrated index, both at a stock and a sector level. It is not representative of what we would think of as UK plc – roughly a quarter of the revenue is generated domestically and clearly it has a huge resources focus.”

This is not just confined to UK small caps either, with the IA European Smaller Companies sector delivering higher average returns than the IA Europe category over one, three, five and 10 years. FE Analytics data also shows the funds in the IA Japanese Smaller Companies sector have significantly outperformed those in the IA Japan sector based on average returns.

But Smids and the funds investing in this part of the market spectrum have already faced far trickier times in 2016.

Ms Rands points out: “With risk appetite waning along with daily fluctuations in investor sentiment, it’s no surprise that Smids underperformed sharply in January. Under such depressed conditions, and with tightening credit markets, volatility is likely to remain high. It also looks like we will have the Brexit vote to contend with this summer, which is likely to add a new wave of volatility for UK companies, regardless of size.”

If the UK votes in favour of exiting the European Union, does that leave the Smid market especially vulnerable?

Richard Penny, manager of the L&G UK Alpha Trust, says: “In the long term the business fundamentals shouldn’t be that bad. But the issue will be with the currency and the uncertainty because markets, as we know, hate uncertainty. Companies are pretty robust and resilient but we don’t want to be complacent about it.”

Ellie Duncan is deputy features editor at Investment Adviser