Since 8 July this year when markets were at their peak, IMA UK Smaller Companies has the worst returns of any UK-focused sector, and the fifth-worst in the IMA universe, with losses of 14.94 per cent. European Smaller Companies was the worst-performing IMA sector, with losses of 19.78 per cent.
While smaller companies funds are often the hardest hit when markets crash, they are also among the fastest risers when things begin to pick up again. On 15 November, FE Trustnet pointed out that, since March 2009 when markets bottomed out following the financial crisis, the UK Smaller Companies sector had returned 89.24 per cent compared with 58.97 from the FTSE 100.
However, while the FTSE has recovered 66.65 per cent of losses made between its peak this year on 8 July and its lowest point, on 5 October, the average UK Smaller Companies fund has recovered just 20.7 per cent of losses sustained in this period.
Performance of sector vs index between 8/7/2011 and 7/12/2011
| Sector/index |
Losses between 8/7/2011 and 5/10/2011 |
Losses between 8/7/2011 and 7/12/2011 |
| IMA UK Smaller Companies |
-18.84 |
-14.67 |
| FTSE 100 |
-14.03 |
-5.94 |
Source: FE Analytics
SF t1ps Smaller Companies Growth has been the hardest hit in the sector with returns of -34.51 since 8 July.
FE Alpha Manager Harry Nimmo, whose Standard Life UK Smaller Companies fund has lost 18.64 per cent since its summer peak, says it is unrealistic to expect small caps to outperform in all types of rally.
"It’s not always a straightforward correlation. Smaller companies tend to do well when market surges reflect optimism in the economic cycle, which isn’t the case at the moment," he said.
"I think the real question is how come the FTSE 100 has performed so strongly since the slump. In the first half of 2011 when everyone was a lot more confident, small caps outperformed large caps by 7 or 8 per cent. In the second half of this year, small caps have given that back and more, and in general the smaller the company is, the worse it has been."
"With large caps you tend to be paid to wait. Balance sheets are very stable at the moment and dividend cover is also very good, which favours large caps as people don’t tend to buy small caps for income."
Nimmo also believes a period of small cap outperformance could be just around the corner. "There is quite an opportunity at the moment," he continued. "Many investors have itchy trigger fingers and there is clearly a wish among them to begin buying again. All it takes is a clear sign that the eurozone situation is close to a resolution and then small companies in particular will be strong."