Small capitalisations have performed exceptionally strongly since March with the FTSE Small Cap index rising by 59 per cent in the 12 months to the end of November.

This has been driven by a recognition that the global economy is not about to go bust and that many small cap companies have a viable future.

Before the Bank of England pumped money into banks – known as "quantitative easing" – valuations in the smaller companies sector had been reduced "to ridiculous levels", says David Battersby, Investment Manager at Leeds stockbrokers Redmayne-Bentley.

"Only once larger cap stocks had recovered as investors sought income did small cap valuations recover," adds Mr Battersby.

There are over 1,000 smaller companies with a stock exchange listing. The way to gain management expertise in stock picking while spreading the savings risk is to opt for a collective fund. This may take the form of an investment trust, unit trust or open-ended investment company (known as an OEIC).

A few funds take a world view such as Invesco Perpetual Global Smaller Companies, which celebrated its quarter century this year. A £1,000 initial saving would now be worth over £18,500. It has over 300 separate holdings which must be difficult to manage.

For UK smaller companies, look particularly at Close Special Situations. An investment over three years has jumped 39.86 per cent after initial charges. Launched in May 2006, it aims to provide capital growth by exploiting special situations, either in individual companies or market sectors which are experiencing significant change.

Managed since August 2008 by Deryck Noble-Nesbitt, the fund has attracted £18m and accepts either lump sums from £1,000 or monthly from £100. Around 40 per cent is in companies quoted on the Alternative Investment Market (AIM).

As an example, Mr Noble-Nesbitt purchased Zetar, an AIM-listed confectionery and snacks business whose shares had fallen from £6 in 2007 to £1 this second quarter.

He felt it could benefit from export opportunities presented by a weaker domestic currency. Its shares have since risen 80 per cent, remain good value and continue to be held in the fund.

The main sectors followed by the fund are mining (15.3 per cent), industrials (11.6 per cent), media (10.10 per cent), oil and gas producers (nine per cent) and insurance (8.10 per cent).

Taking a five-year view, the top UK smaller companies (after initial charges) according to independent research by Lipper are:

n Standard Life Investments – up 73.6 per cent;

n Old Mutual – up 70.6 per cent;

n Investec – up 62.4 per cent;

n Cazenove – up 53.3 per cent.

However, there have been some serious under-performers, notably CF Canliffe (down 33.5 per cent), Rensburg UK Micro Cap Growth (a 23.6 per cent fall) and Invesco Perpetual (down 17.1 per cent).

Martin Payne, director at Leeds stockbrokers at Brewin Dolphin, particularly likes the Standard Life OEIC, which has been successfully managed by Harry Nimmo since launch in January 1997. Now £430m in size, it is composed of 64 stocks. It accepts lump sums from £500 and monthly contributions from £50.

Mr Payne recommends that five per cent of a balanced portfolio is invested in smaller companies, which equates to 10-15 per cent of all equities.

A good tip is given by Jonathan Baker of private client stockbrokers Charles Stanley in Leeds: "Investment trusts focusing on smaller companies look very cheap on a discount to net asset value basis. The most defensive names, such as Aberforth, trade at a 15 per cent discount, whereas more growth-orientated companies – such as BlackRock Smaller Companies or JP Morgan Smaller Companies – are trading at a near 20 per cent discount."

Mr Baker particularly likes the first two funds, adding, "Both are managed by highly regarded teams and on current valuation levels look attractive."

Among investment trusts, after deducting a typical 3.5 per cent for expenses, data from the AIC using Morningstar research reveals Gartmore Growth Opportunities was the top performer over three years, up 35 per cent.

On the same basis, over five years the same trust has grown 78 per cent. Over the same time frame, look at:

n SVM UK Emerging – up 108.1 per cent;

n Standard Life – up 106.8 per cent;

n Athelney – up 67.8 per cent.

Entrepreneurs founding small companies can gain financial help, such as the Enterprise Finance Guarantee, which is £1.3bn in loans and, in England, the Regional Loan Transition Fund, which is specifically for those businesses which are refused loans by banks and other commercial lenders.

Continental Europe is a major source of smaller companies. Charles Stanley like JP Morgan Euro Fledgling, which is on a 20 per cent discount and looks very attractively priced. Very actively managed, it has an excellent long-term track record. According to the AIC, this investment trust has grown 101.9 per cent in five years and 134.6 per cent over a decade after taking charges into account.

Other investment trust stars in this sector include European Assets (up 41.6 per cent and 156.2 per cent over five and 10 years) and TR European Growth (up 75 and 47.5 per cent respectively over the same period). The weighted average was 76.8 and 84.5 per cent.

Among European unit trusts/OEICs, Baring Europe Select and Threadneedle European Smaller Companies have romped away, growing by 104 and 90.1 per cent respectively over five years, according to Lipper.

North America has not generally been the place to be for smaller companies. The average growth for investment trusts has been under two per cent over five years and 58.5 per cent over 10 years. The top performer, F&C US Smaller Companies, achieved growth of 23.8 and 48 per cent respectively over these periods. Redmayne-Bentley note that this trust has a wide discount of over 18.5 per cent and the largest capitalisation but no gearing in line with its peer group.

Renaissance US Growth is favoured by Charles Stanley. They say: "It is very focused with significant business exposure in China and run by a very experienced manager from Texas." It grew by seven and 107.5 per cent respectively in the last five and 10 years.

Apart from F&C US Smaller Companies, Brewin-Dolphin tip Schroder US Smaller Companies, which has seen 29.9 per cent growth over five years.

Avoid Japan for its smaller companies funds. On average, £100 invested there in investment trusts would now be worth just £45.78 over three years, £56.66 over five years and £31.27 over 10 years, after allowing for charges.

Among unit trusts/OEICs, the results are equally disappointing. The top performer over three years was M&G Japan Smaller Companies, which lost 16.22 per cent, and over five years, Scottish Widows Japanese Smaller Companies lost 2.73 per cent.

Mr Battersby, at Redmayne-Bentley, says: "In Japan the outlook is muted as there is a risk of a return to deflation with recovery pushed to 2011."

This explains why there are so wide discounts – such as 30 per cent on Prospect Japan – despite its recent excellent performance. It might be worth a punt.