The latest research from FE Trustnet highlights that UK, European, Japanese and US smaller company funds have all produced better returns over the past 15 and 20 years than their all-cap counterparts.

The figures underline that over past 15 years, the average IA UK Smaller Companies fund returned 195 per cent compared with 86 per cent by more mainstream IA UK All Companies funds.

The same trend applies in Europe, with the average European smaller companies fund returning 154 per cent on average compared with 81 per cent from European all-companies funds.

Across the Atlantic, North American small-cap funds outperformed all-caps by 100 per cent to 39 per cent and in Japan small-caps beat all-cap funds by 44 per cent to 4 per cent.

This performance gap is equally pronounced over 20 years, with smaller cap funds beating their all-cap counterparts in each of the four region. In fact, in three out of four cases – the average small-cap fund achieved more than double the returns of the all-cap funds. (Please see below)

FE’s Tahmina Mannan says: “The greater returns from the small-cap sectors over 15 and 20 years is due to the fact that smaller companies tend to grow more strongly than larger companies, (which may have already reached their peak).

“Even looking at the shorter-term, in the case of the UK, you can see that the small-cap sector held up better than its larger counterpart during the recent market sell-off. This is because these sorts of businesses are more reliant on the UK economy and therefore less susceptible to the slowdown in China and the impact that it could have on other economies in the world.”

Large-cap funds versus small-cap funds (sector averages):

UK All Caps 20 years: 274.54%

UK Smaller Companies: 577.04%

UK All Caps 15 years: 86.76%

UK Smaller Companies: 195.3%

EUR All Caps 20Y: 346.49%

EUR Small Caps: 737.54%

EUR All Caps 15Y: 81.20

EUR Small Caps: 154.54%

North America All Caps 20Y: 277.98%

NA Small Caps: 433.22%

North America All Caps 15Y: 39.84%

NA Small Caps: 100.9%

Japan All Caps 20Y: 37.90%

Japan Small Caps: 122.24%

Japan All Caps 15Y: 4.48%

Japan Small caps: 44.70%

Source: FE Analytics. Data till 05/11/2015

Despite the higher returns in small-cap funds, the size of the average all-cap fund still notably outweighs that of the average small-cap fund, FE Analytics data shows.

Mannan adds: “However, while returns have been greater, investors are often deterred by small-cap funds. This is because smaller companies funds are generally considered to be higher risk than their large-cap counterparts. If you look at the maximum drawdown of the two sectors, which shows the amount an investor would have lost if they bought and sold at the worst possible time - over the past 15 years an investor would have lost 10 per cent more in the small companies sector. ”

Data from FE Analytics show that investors currently have £161 billion invested in the IA UK All Companies sector with to £12.4 billion in the IA UK Smaller companies sector.

The same trend can be seen in the other three markets, with £48 billion in mainstream European funds but only £6 billion in small caps, £55 billion in US all-cap funds compared to £3.2 billion in smaller companies funds, and £23 billion in Japanese all-caps but just £1.6 billion in small-caps.

Sector AUM in millions: correct at 05/11/2015

UK All Caps – £161bn, UK Smaller Companies - £12.4bn

European All Caps - £48.1bn, European Small Caps - £6.5bn

North America All Caps - £55bn, NA Small Caps - £3.2bn

Japan All Caps - £23.7bn, Japan Small caps - £1.6bn

Source: FE Analytics. Data till 05/11/2015

For investors considering the small cap sector, Mannan adds: “Do you have the appetite to take on more risk? Investors should sit down with an independent financial adviser and asses all possible scenarios before going for a higher risk fund.

"Generally speaking, if you are young, you can afford to take on more risk as you have the ability to ride out shocks and dips in the market that may affect your fund. Today’s research clearly highlights that the longer you are invested in small-cap funds, the better your chances of higher returns.”