Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

There have been several distinct phases in the market’s reaction to the Covid-19 pandemic.

The first month or so - from mid-February 2020 onwards - saw a broad-based sell-off as investors digested the news that the world was about to be seriously disrupted by the illness.

When prices bottomed out towards the end of March 2020 investors began to apply a bit more subtlety, looking for those industries which could not only survive lockdown intact but could actually thrive. That’s when it became clear that industries such as consumer staples, specialty online retailers, grocers and, most importantly of all, the tech platform giants could drive the overall level of the market higher.

That phase lasted until the late autumn, when more positive news on vaccines came through and it became clear that there was a potential route out of lockdown. Since late October, a new phase has been emerging in which investors have begun to see value in buying those companies hurt most by the early phases of the lockdown. With confidence growing that economies can open up and begin to grow more quickly again, the prospects of companies which had their stock market valuations driven much lower by the pandemic up until that point have become more attractive.

This latest rotation can be expressed in various different ways. There has been a shift from high-quality ‘growth’ companies - those which have shown their earnings can grow solidly - towards ‘value’ companies - those whose stock market value is low compared to their earnings, which have been put in question. You might see this expressed as a shift from defensive sectors which can do well whatever the economic conditions towards ‘cyclical’ companies, or those which do most of their running when the economy is growing.

Another way to look at it is through the lens of big companies versus small companies. The world’s biggest companies include many of those which did best in the early days of lockdown, particularly large tech companies. That was at the expense of smaller companies that tend to be more reliant on their domestic economy to perform well. Since the autumn, however, there is evidence that small companies are now making up the running.

In the giant US stock market, aggregate performance of smaller companies can be measured by the Russell 200 Index. Figures cited by the Financial Times this weekend show that the Russell 2000 has risen more than 47% since the start of November and is up 15% so far in 2021. By comparison, the benchmark S&P 500 is up 19.5% since November and 4% this year. Please remember past performance is not a reliable indicator of future returns.

In the UK, you can see the same, albeit more muted, effect by looking at the performance of funds which focus on smaller companies. Average performance of funds in the Investment Association UK Smaller Companies sector has been around 27% since November 1, according to data provider Trustnet. The same figure for the wider IA UK All Companies sector is around 22%.

For most investors, their portfolio will skew towards holding more in large companies than small companies. That’s as it should be, given that large companies have been historically less volatile than their smaller counterparts. If you want to up your allocation to smaller companies, however, our Select 50 list of favourite funds has a number of options.

Fidelity Special Situations is managed by Alex Wright and holds a portfolio of mid-sized and smaller British companies with a value bias. Threadneedle UK Mid-250 is another fund which focuses on the mid and smaller-cap end of the UK market while, for the US, the Schroder US Mid-Cap Fund will do the same job.

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Select 50 is not a personal recommendation to buy or sell a fund. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

Topics covered:

Active investing; DiversificationFunds; Global; Shares

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