UK investors looking to gain exposure to this growth story tend to stay close to home, but there are a number of viable options overseas. Here are a few options to consider:
Europe
European funds have performed surprisingly well in the last three years given the sovereign debt crisis.
IMA European Smaller Companies has returned more than IMA North American Smaller Companies over this period, despite the higher growth in the US economy.
Two Threadneedle funds stand out in the sector. Threadneedle Pan European Smaller Companies has the strongest returns over three years, gaining 80.58 per cent. The five FE crown-rated fund is the third-best performer in its sector over five years, with returns of 20.09 per cent.
The portfolio is able to invest in small cap UK stocks as well as continental equities, but as of March only 24.8 per cent was invested domestically.
Performance of funds vs sector over 5-yrs
Source: FE Analytics
The Threadneedle European Smaller Companies fund comes top over five years and third over three, perhaps suggesting it doesn't perform as well in rising markets.
The fund aims to focus on under-researched stocks and limit risk. Its annualised volatility of 16.76 per cent is the lowest in the sector, just below its sister-fund’s score of 16.8 per cent.
Headed up by FE Alpha Managers David Dudding and Philip Dicken, the four-crown fund has returned 24.13 per cent over five years and 73.74 per cent over three.
Philip Dicken has sole control of Threadneedle Pan European Smaller Companies. Both Threadneedle funds have a TER of 1.69 per cent and are available with a minimum investment of £2,000.
Global
For investors who are reluctant to limit themselves to one region, the Invesco Perpetual Global Smaller Companies fund is worth a look.
Over three and five years it has returned 70.19 and 27.84 per cent respectively, compared with 63.34 and 24.21 per cent from the MSCI World Small Cap index.
The fund’s most overweight region is the US, where the fund has 30 per cent invested.
Lead manager Nick Mustoe has outperformed his peer group composite in eight out of the last 10 years, and six out of six years in rising markets.
His team includes FE Alpha managers Bob Yerbury, Paul Chesson and Richard Smith.
Japan
In Japan the M&G Japan Smaller Companies fund is the standout performer, returning 61.19 per cent over three years, the highest in the IMA Japanese Smaller Companies Sector, and 31.87 per cent over five years, putting it in second place for this period.
Performance of fund vs sector over 3-yrs
Source: FE Analytics
The fund’s TER of 1.73 per cent is higher than second-placed Baillie Gifford Japanese Smaller Companies, which has 1.51 per cent, but the latter fund underperformed over five years, losing -0.36 per cent.
Run by FE Alpha Manager Max Godwin since 2007, investors can gain access to the fund with an initial £500 and a top-up of just £10.
North America
Some of the best-performing funds in the North American Smaller Companies sector are soft-closed.
The £503m Schroder US Smaller Companies fund, however, is open for a minimum initial investment of £1000 or monthly top-ups of £50.
The four FE crown-rated fund is run by FE Alpha Manager Jenny Jones and has performed well in the long-term, returning 91.8 per cent over 10 years – putting it top of IMA North American Smaller Companies.
Although it has underperformed over three years, it is one of the least volatile in its sector, so could be a good option for investors unconvinced of the global economy's prospects.