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The average UK smaller companies manager will outperform their benchmark, the FTSE small cap index, over most periods – in fact, by 29 percentage points over five years and 79 percentage points over 10 years to May 1 whereas the average UK equity unit trust has underperformed the FTSE All Share index by 10 percentage points over five years and 50 percentage points over 10 years.

I believe that UK small caps will deliver profitable returns over the next year and will outperform the market over the next three years.

Resolution Management’s David Clarke confirms this view as small caps are currently being priced at a discount.

Over the longer term, these companies should start to outperform large caps again.

Over the very short term, it is impossible to predict performance as volatility can be huge and individual shares can move up or down by up to 30 per cent in a day.

A lot of niche companies are still performing well and increasing their profits substantially, as well as quite a lot of companies in the industrial sector and the oil and gas sector where some suppliers to the major oil companies are continuing to flourish.

Resolution’s smaller companies fund has outperformed the sector average by substantial amounts over two and three years, being up by 48 per cent over three years against the sector average of only 23.4 per cent to May 1, 2008.

Other smaller companies trusts I like are Artemis UK smaller companies, M&G smaller companies and Standard Life UK smaller companies.

I believe it is time to move out of large caps and mid caps and to invest in smaller company trusts.

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