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Julian Gibbs

I believe that UK smaller companies will be the topperforming UK sector over the next year. Over the past year, the sector has fallen by around 25 per cent against a fall of 17 per cent in the UK all companies sector and by around 12 per cent in the UK equity income sector. It is now undervalued.

However, over three years, UK smaller companies have gone up by 23 per cent against a fall of around 7 per cent in the UK all companies sector.

Over 10 years, they have also outperformed the UK all companies sector and tracker funds by a wide margin. Thirty-three out of the 44 smaller companies unit trusts outperformed the longest existing index tracker, Gartmore UK index.

Smaller companies trusts are more volatile than their bigger counterparts and have periods of underperformance but they nearly always outperform when interest rates are low and when global economies are recovering.

Fund managers in this sector have to be more skilful than fund managers running unit trusts which invest in bigger companies, so the best smaller companies managers are well worth following.

Nearly all the top 20 UK unit trusts over the past three years are either specialist smaller companies trusts or those which, like ABN Amro UK growth and ABN Amro equity income, have at least 30 per cent invested in smaller companies most of the time.

The trusts I like include Artemis smaller companies, which has outperformed all trusts in the sector by 57 per cent over three years. Other good trusts include Marlborough special situations and Close Beacon investment trust, which invests entirely in Aim companies and is more speculative. I also like UK smaller companies funds from Merrill Lynch, Aberforth and BWD.

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