Woodford saga risks putting investors off smaller companies

On the whole smaller companies are largely neglected by investors, and this is unlikely to change following Neil Woodford's spectacular fall from grace.

Neil Woodford's dramatic fall from grace risks dampening the appeal of smaller-company investing, cautions Peter Ewins, lead manager of the BMO Global Smaller Companies investment trust (LSE:BGSC).

At an event organised by FundCalibre, the fund research ratings agency, Ewins said the "Woodford effect" is an issue that could deter investment into smaller companies.

"There's certainly a negative vibe around smaller companies as a whole at the moment, due to the Woodford effect, which as a smaller company fund manager myself I am not happy about," he said.

Ewins acknowledged that the perception of some people that smaller companies are "too risky" to invest in will not have been helped by events that led to the closure of the LF Woodford Equity Income fund.

"Big companies can also run into trouble," he said, adding that Woodford suffered from having "too many blow-ups" in terms of making the wrong stock calls, and from having too great an exposure to illiquid unlisted companies.

He added:

"The whole Woodford affair is unfortunate for the whole fund management industry, and I do hope it starts to die down a bit. Retail investors should not panic and abandon smaller companies."

Ewins pointed to the fact that over the long term, smaller companies significantly outperform larger businesses as a key reason why investors should not turn their backs on smaller-company investing. 

For more seasoned investors, the so-called small-cap premium has long been a staple of equity investing, particularly in regard to the UK market. Yet, despite this outperformance, smaller companies are both under-owned and under-researched. 

The numbers speak for themselves: research in 2016 by professors Elroy Dimson and Paul Marsh at the London Business School found that £1 invested in 1955 in the Numis 1000 index, composed of the 1,000 smallest UK-listed companies, would have grown to £12,144 by the end of 2015. In contrast, £1 invested in the FTSE All-Share index over that 60-year period would have grown to just £829.

Added to that, research by Money Observer earlier this year found strong evidence that in developed markets small is beautiful, particularly in the UK, Europe and Japan. In these three regions, on both a five- and a 10-year view, smaller company funds have outperformed funds with the flexibility to be size-agnostic. The small cap premium is less prevalent in Asia and the emerging markets, however.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.