SECTOR PROFILE
market , but longer term , the brave could well be rewarded .”
Monte Carlo or bust Ryan Hughes , head of investment research at AJ Bell , notes that , given their sensitivity to the domestic economy , many companies could go bust if there is a prolonged slowdown . However , given that market timing is notoriously difficult , he says UK small caps still have a place in investors ’ portfolios if their time horizons are suitably long . “ Plenty of volatility has to be expected in the coming months and therefore investors will need to be prepared for this ,” he says . “ Currently in our higher-risk portfolios , we have a 3 % allocation to UK smaller companies .” Hughes adds that it is vital that investors understand their fund manager ’ s strategy , as the sector contains high-growth , value , mid-cap and even micro-cap funds . “ Given small-cap investing is often about the quality of management teams , I have a preference for using funds and trusts that have experienced fund managers who
24.1 %
– fall in the IA UK Smaller Companies sector this year
have followed the journey of companies through time ,” he says . “ Smaller companies will often go through various trials and tribulations , including refinancings and M & A , and being able to keep a calm head is important .” Hughes adds that another important factor to consider is fund size , given liquidity is important when using open-ended vehicles . “ If a fund is too large , it may end up owning large positions in companies that may be difficult to exit , or alternatively end up having a greater number of positions because it can ’ t get enough stock to
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