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Julian Gibbs

While so many UK all companies funds are really closet trackers, managing a smaller company fund is a true test of a fund manager&#39s skill

About half of the smaller company funds in the UK have outperformed their benchmarks over both five and 10 years and, while smaller company funds have higher volatility than UK all companies funds, it is not that much higher.

When the world economies begin to recover, smaller companies will start to outperform as a lot of them are still on low valuations in relation to their future prospects.

Over the past year, both UK sectors have performed equally poorly, both being down by about 12 per cent on average, but I now believe that the smaller company sector is due for a substantial recovery.

The funds I like include Simon Knott&#39s discretionary unit trust which, despite the downturn, has shown an average return of 13.6 per cent a year over the past 10 years – an outstanding result by anyone&#39s standards and an even better result than that achieved by the brilliant Anthony Bolton of the Fidelity special situations fund. Over five years, Knott beats Bolton easily, too.

Other funds I like include Marlborough special situations, Old Mutual select smaller companies and Liontrust intellectual capital.

In North America, I like Merrill Lynch American opportunities. I also like Baillie Gifford Japanese smaller companies and Baring Europe select.

I expect all these funds to be near the top of their sectors and show excellent profits over the next two or three years.

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