James Dalby, market intelligence manager of Aviva, says it is important to have a balance of UK equity exposure across all company sizes – large, medium and small. In this case, Mr Dalby says a UK multi-cap fund could fit the bill.
Equally he says you could also consider going global with a broader set of Smaller Companies funds, like Japanese, North American and European Smaller Companies.
If you want to invest in smaller companies but not necessarily in the UK, Catherine Stanley, manager of the F&C UK Smaller Companies fund, agrees there are plenty of region/country specific alternatives to choose from.
Given that it is notoriously difficult to successfully predict which region or country is likely to outperform next, however, Ms Stanley says it might be that a smaller company fund with a global remit is the best option.
For those keen to get exposure to UK smaller companies and who are prepared to take a greater degree of risk, Patrick Connolly, Certified Financial Planner at Bath-based Chase de Vere Independent Financial Advisers, says a venture capital trust (VCT) could be considered.
VCTs provide 30 per cent initial income tax relief which can be offset against any income tax liability for investments up to £200,000 each year, plus tax free dividends and tax free capital growth.
They qualify for this relief by investing in a portfolio of businesses, which at the time of investment had gross assets of less than £15m, and fewer than 250 employees. Certain trades are also excluded, such as banking, insurance and businesses earning from feed-in-tariffs.
He says: “While the tax benefits are undeniable, these vehicles typically invest in small unquoted companies and so can be very high risk.
“They should only be used by those who have a broad investment portfolio already in place and who understand and accept the risks involved.
“Also, if investors then want to exit their investment, they will find that there is a very limited second-hand market, meaning that many VCTs stand at a sizeable discount to their net asset value.
“This discount acts as an exit penalty for investors, and even though some VCT providers offer to buy-back their VCTs, investors can still expect to face a minimum 10 per cent charge if they want to get out.”
