Small caps beautiful for investors

STOCK market small-fry dramatically outpaced the overall equities market last year, and the tiniest of these companies did best of all.

Small-capitalisation stocks, as measured by the Hoare Govett Smaller Companies index, produced a total return of 40.4% last year, almost double the 20.9% returned by the FTSE All Share index.

A sub-index of the smallest minnows, the Hoare Govett 1000, delivered a spectacular 59.9% return as bear-market jitters, which had crucified many constituent companies, receded.

Smaller firms outperformed across all 11 industry sectors analysed, according to the study by Hoare Govett parent ABN Amro and the London Business School.

The findings reinforce the view that small companies produce better returns over the long term: £1,000 invested in the HGSC index in 1955, with all dividends reinvested, would now be worth £1.5m; the same amount put into the All Share would have grown to £400,000.

ABN head of small company research Richard Rae said the vintage year was unlikely to be repeated, adding: 'But 2004 has started very well and small-caps are still cheaper than large caps. Looking forward, we see small-caps broadly matching the market over 2004.'

The HGSC index accounts for 10% of the overall market by value and contains the smallest 1,133 listed companies, the largest of which has a market value of £724m.

The HG1000 covers 2% of the market by value and relates to the 852 smallest companies, the largest of which is valued at £160m.