Comparative volatility of small cap and micro cap funds

aroominyork

A few days ago I ran a five year table on Trustnet of UK smaller companies. The best performing was Liontrust UK Micro Cap, but interestingly it also had the lowest FE risk/volatility rating of 86. Its big sister fund, UK Smaller Companies, was fifth on performance with an FE of 105.

I wrote to Liontrust to ask if they had done any analysis on this difference in volatility and they replied that while they had not, share prices of micro caps might be driven more by company-specific newsflow, while smaller companies are more affected by wider market sentiment or thematic and macro-economic views.

The only other investment house that has a smaller companies and a micro cap fund is Gresham, with FEs of 103 and 88 respectively, ie the same pattern of lower volatility at the micro end.

I find this an interesting slant on the common view that share prices of smaller companies are more volatile than larger companies. While that might be true of the smaller companies sector – a FTSE250 index fund is FE136 compared to the benchmark FE100 of the FTSE100 – perhaps it does not hold true as you go further down the cap scale and reach a point where share prices are more driven by company fundamentals than by sentiment and macro-economic news.