The UK market has a long tradition of collective investing in smaller companies, which means there is a wide range of funds and trusts available to investors looking for broad exposure rather than to pick individual stocks themselves.

There are two dozen trusts listed on the Association of Investment Companies website, with a combined market cap of around £6 billion, while the Investment Association lists 26 funds with a combined market cap of £5.5 billion.

There are several advantages to buying smaller-cap companies through a fund or trust, primarily you get the benefits of diversification without having to keep tabs on dozens of individual stocks yourself, which can be time-consuming.

Also, the ‘spread’ when buying and selling as an individual can be quite wide (as much as 10% in less liquid names), whereas a fund or trust can often buy shares at a better price in ‘blocks’, and if one of your stocks is taken over and you are offered foreign shares as part of the deal (as in the case of Dowlais (DWL)), the managers handle the paperwork and hold the stock.

EXAMINING SMALL CAP INVESTMENT TRUST PERFORMANCE

Interestingly, performance across the small-cap universe has been far from uniform with many funds and trusts posting negative returns over one year or five years, and in some cases over both periods, which we suspect reflects the impact of the pandemic on one hand and the continual drain of money out of UK equities into bonds and international equities on the other.

The biggest trust by market cap, and one of the best-performing, is Aberforth Smaller Companies (ASL) run by Edinburgh-based Aberforth Partners.

With total assets of £1.45 billion, Aberforth has a consistently positive track record, returning around 9% over one year, 13% over five years and 84% over 10 years.

The managers take a bottom-up value approach, looking for shares in companies which they believe are selling for less than their intrinsic worth.

As a result, the trust is overweight consumer cyclicals, financial and industrial stocks, relative to the small-cap index, and underweight basic materials, energy, health care, real estate, technology and utilities.

The active share – that is, the percentage of the portfolio which differs from the stock weightings in the Deutsche Numis Smaller Companies Index – is high at 78%, and the list of top 10 holdings demonstrates this quite nicely.

Another trust which has been a steady performer – and has beaten Aberforth by quite a margin over 10 years, although it has more or less matched it over one year and five years – is JPMorgan UK Small-Cap Growth & Income (JUGI).

Managed by Georgina Brittan and Katen Patel, the trust has been on our Great Ideas list since March 2024 but has yet to really hit its stride.

With a market cap of a little more than £500 million of assets, it trades at roughly a 10% discount to NAV, and as well as looking for capital growth from its investments, consistent with its income mandate it pays quarterly dividends totalling at least 4% of the NAV as at the end of the preceding year.

As of December last year, the trust was significantly overweight consumer stocks relative to the small-cap benchmark and marginally overweight financials and energy, with underweights in basic materials, health care, industrials, telecoms and utilities.

Although it doesn’t publish its ‘active share’, it must be close to Aberforth as its top 10 holdings differ quite markedly from the benchmark in terms of weightings.

TWO MORE TOP PERFORMING FUNDS

In terms of funds, again there are two which stand out as having avoided losses and performed consistently well over one, five and 10 years – Fidelity UK Smaller Companies (B7VNMB1) and RGI UK Listed Smaller Companies (B1DSZS0).

The Fidelity fund, which has a market cap of around £700 million, has returned 5% over one year, 43% over five years and 138% over 10 years.

Run by Jonathan Winton for the past decade, the fund is five star-rated by Morningstar and has strong bias towards ‘value’ and ‘core’ holdings in economically-sensitive sectors, with overweights in basic materials, consumer cyclicals, financials and industrials, and significant underweights in energy and health care.

Also, judging by its top 10 holdings, it has a fairly high active share against the benchmark, not least as it includes one or two stocks which could more accurately described as mid-caps, such as Serco (SRP) and WPP (WPP).

RGI UK Listed Smaller Companies is around half the size of the Fidelity fund at £355 million but is neck and neck in performance terms over the last year with a 5% gain, although its five-year and 10-year returns aren’t quite as stellar.

Managed for the last seven years by George Ensor, the fund has an active share of 84% as like other small-cap managers Ensor is overweight consumer cyclicals, financials and industrials, together with technology, and underweight health care and staples by some margin.

This is borne out by the top 10 holdings, which include holiday company On The Beach (OTB), greetings-card seller Moonpig (MOON), facilities management group Babcock (BAB) and Shares 2025 Tip of the Year, legal services business FRP Advisory (FRP:AIM).

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