YOUR PORTFOLIO
Micromanagement
The arguments for using passive funds are well known , and laid out in detail in this month ’ s cover feature . However , trackers do not deliver the same advantages in every part of the market and one area where active managers still have the edge is in smaller companies . While small caps tend to deliver higher returns than their larger counterparts over the long term , analyst coverage tends to be lower . According to data provided by Unicorn , while the average FTSE 100 stock is covered by 19 analysts , this falls to four for stocks on the FTSE Small Cap index and one for those on AIM . This lack of scrutiny throws up more pricing inefficiencies , making it easier for a fund manager who is willing to carry out their own research to outperform .
Data from FE Analytics shows the average IA UK Smaller Companies fund has significantly beaten the Numis Smaller Companies ( ex ITs ) index , the most common benchmark in the sector , over the past three , five and 10 years . Of the 41 funds in the sector with a track record long enough to be included in the study , just six – or 14.6 % – underperformed the index over the past decade .
A special relationship This active advantage doesn ’ t just apply to small caps in the UK , either , and even stretches to the superefficient US market . The average IA North American Smaller Companies fund has made 270.7 % over the past decade , compared with 240.8 % from the most common benchmark in the sector , the Russell 2000 . Of the 12 active funds with a track record of at least a decade , just two underperformed the index – or 16.7 %. However , these figures have been aided by recent conditions . Looking back to the 10 years to the end of 2020 , the IA North American Smaller Companies sector had still
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