Most investors will concentrate their investing firepower on the large quality companies that make up the FTSE 100. Institutional investors such as pension schemes tend to focus on this sector on the basis that the smaller companies are more risky and less well researched.
Low cost trackers are increasingly popular with small private investors - these will typically track the FTSE 100 or FTSE All Share index (the FTSE 100 makes up around 85% of the all share). Trackers will be a good choice in most situations mainly due to the low costs, however if you want exposure to the lower strata of the UK market, there is no option of tracker (yet!) so the choice will be between individual shares, OEICs or investment trust.
In a recent article I looked at the importance of maintaining a diverse portfolio. A good way to do this is by including smaller companies as part of the mix - when you look at the long term comparisons, SC investment trusts or OEICS will usually feature somewhere near the top of the leader board - especially over the longer periods.
2012 was an excellent year according to the Numis Smaller Companies Index (previously Hoare Govett) which rose 30% compared to the FTSE 100 total return of 10%. Although the index was first published in 1987, the data has been recorded since the mid 1950s and over this extended period, smaller companies have enjoyed an average total return of around 15% CAGR which is over 3% p.a. more than the FTSE All Share index. As we have seen (here) small percentages over long periods can make a big difference.
“Supported by long term data, which show that dividend yield and dividend growth have accounted for over three quarters of the total real return from small companies, your managers believe that income will continue to be crucial to future returns from the asset class and, indeed, from equities in general.”