One of the reasons why investors might steer clear of smaller companies is because many of them are not as exposed to the vagaries of international markets to their larger counterparts and are thus more exposed to the ups and downs of the UK economy.
They also often have poorer access to capital markets, higher borrowing rates and are less liquid than mid and large-caps which makes them mover volatile.
However, Philbin points out, consider the difference between largest ten stocks in the FTSE 100 and the largest ten in the MSCI UK Small Cap Index: the former equate to more than 40% of the index, while the latter account for under 15%, giving smaller companies better growth prospects – for example, it is far easier for a company with market capitalisation of £200m to double in size than one with £20bn.
While there is truth in the argument that volatility of performance in the UK Smaller Companies Sector is high, the most recent volatility numbers for funds are a long way behind the average, and in the ten years up to 31 August 2014, 34 of the 37 funds in the sector beat the average return from the UK All Companies Sector, Philbin said.
In addition, volatility can work both ways – a stock that surprises on the upside can see a rapid rise in its share price and turn the negative of tighter share-holder register into a positive – while the apparent downside of no international exposure means that smaller companies are not as exposed to the movements of currency markets.
Click here for six smaller companies funds to keep an eye on
