Smaller companies’ funds have been gaining popularity in recent years as more investors are recognising their potential to outperform larger companies’ funds. These funds focus on investing in smaller, less established companies with the potential for high growth. In this blog post, we will explore why smaller companies’ funds may outperform larger companies’ funds and how to optimise your investment portfolio for maximum returns.
One of the main reasons smaller companies’ funds may outperform larger companies’ funds is their potential for higher growth. Smaller companies have more room to grow compared to larger, more established companies. They also tend to be more nimble and able to adapt to changing market conditions, which can lead to higher returns. Additionally, smaller companies are often overlooked by larger investors, which can create opportunities for those who are willing to take on more risk.
Another key factor that can contribute to the outperformance of smaller companies’ funds is their diversification potential. Large companies’ funds tend to be concentrated in a few large companies, which can increase the risk in the portfolio. Smaller companies’ funds, on the other hand, offer investors the opportunity to spread their investment across a wider range of companies, which can reduce the overall risk in the portfolio.
When it comes to optimising your investment portfolio for maximum returns, it’s important to conduct thorough research and due diligence before investing in any fund. This includes looking at the fund’s historical performance, the fund manager’s track record, and the fund’s expenses. Additionally, it’s important to diversify your portfolio by investing in a mix of different types of funds, including smaller companies’ funds, large companies’ funds, and international funds.
Over the past 20 years, the S&P Small Cap Index (SML) has grown earnings 57% faster than the S&P 100 Index (OEX) (11% vs 7%). That’s an outperformance of 36%.
In conclusion, smaller companies’ funds have the potential to outperform larger companies’ funds due to their potential for higher growth and diversification potential. By including smaller companies’ funds in your investment portfolio, you can increase the potential for higher returns while also reducing overall risk. However, it’s important to conduct thorough research and due diligence before investing in any fund and to diversify your portfolio to optimise your returns.
As the legendary investor Jim Slater once said that elephants don’t gallop but fleas can jump 100 times their body height! I subsequently discovered that elephants can in fact run at 40 kms an hour but not for very long whereas fleas can actually jump 200 times their body height!
Jim Slater also said “Investment is essentially the arbitrage of ignorance. The successful investor believes he knows something that other investors do not fully appreciate. There is very little that is unknown about leading stocks. In contrast…most leading brokers cannot spare the time and money to research smaller stocks. You are therefore more likely to find a bargain (with some ignorance to arbitrage) in this relatively under-exploited area of the stock market“.
So if you are looking for a fund that invests primarily in smaller companies then look no further than the YFS Intelligent Wealth Fund. You know it makes sense.*
* Risk warnings
The value of investments can fall as well as rise. You may not get back what you invest. The information contained within this article is for guidance only and does not constitute advice which should be sought before taking any action or inaction. All information is based on our current understanding of taxation, legislation, regulations and case law in the current tax year. Any levels and bases of relief from taxation are subject to change. Tax treatment is based on individual circumstances and may be subject to change in the future. This blog is based on my own observations and opinions.
