The diversification benefits and outperformance of global smaller companies compared to other major asset classes is significantly underestimated, while the perceived risks are often overstated, according to Invesco Perpetual.

The investment manager believes that investors still have little exposure to global smaller companies due to concerns that they are riskier than bigger companies. However, small caps represent 15 per cent of global stock markets, rising to 30 per cent for small and mid caps combined.

According to a study by Choi et al during the period between 1926 to 2007, smaller companies had on average the highest returns compared to other asset classes including government bonds, corporate bonds and large cap stocks, and the average long-term expected volatility is exactly the same for smaller companies as it was for larger companies.

In a statement, Invesco Perpetual said they believe that smaller company returns are driven primarily by local and company specific factors, whereas larger-company performance is driven by global factors.

Hugh Ferrand, institutional client director at Invesco Perpetual, said: “The fact that returns from global smaller companies have been greater than those from government bonds won’t surprise many pension fund trustees, but it’s important to note that evidence points to long term volatility for smaller companies being no different to that of larger companies. This is especially relevant to institutional investors who commit funds for the longer term, but who are less likely to invest in smaller companies.”

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