Market volatility has spurred a widening gap between the performances of small cap managers, according to research manager Lonsec.

Its latest small cap fund review of 26 managers revealed the worst performing manager returned -42.5 per cent, while the best manager returned -9.7 per cent.

"The increased spread can in part be attributed to the increase in the volatility of the market," Lonsec senior investment analyst Lin Ngin said.

The standard deviation of the ASX Small Ordinaries increased from 8.1 per cent in July 2007 to 22.5 per cent in July 2008, according to Ngin.

The performance of the small industrials and small resources funds were markedly different.

"Industrials returned a woeful -42.5 per cent and resources remained flat," he said.

The report included managers from the traditional small cap funds, micro cap funds and mid cap funds.

Five managers were downgraded in the review.

Equity Trustees Smaller Companies Fund was downgraded from recommended to investment grade. CFS Smaller Companies Fund (Core), Goldman Sachs JBWere Emerging Leaders Trust, ING Emerging Companies Trust Fund and Challenger Micro Cap Fund were all put on fund watch.

The four managers that were placed on fund watch were due to staff changes and turnover, Ngin said.

However, there were upgrades. Credit Suisse Australian Small Companies Fund (from hold to recommended), Macquarie Australian Small Companies Fund (from investment grade to recommended) and Aviva Emerging Shares Trust (from investment grade to recommended).

Eley Griffiths Group Small Companies Fund, Ausbil Australian Emerging Leaders Fund and Pengana Emerging Companies Fund were awarded the rating of highly recommended.