The best UK small-cap funds

UK smaller companies are having a buoyant few months, with the Numis Smaller Companies 1000 index delivering double-digit gains since March. Seeing this unloved part of the market outperform the FTSE 100 for a period of time, even if it is a relatively brief one, is cause for tentative celebration.

In terms of valuations, UK small caps have looked attractive for a long time. But those valuations have remained depressed, so it is better not to get swept away by optimism. However, Darius McDermott, managing director at Chelsea Financial Services, sees early signs that the tide might be turning.

“The rally in large caps suggests that confidence in UK assets is returning – and historically this often marks the early stages of a broader recovery that can trickle down into small caps,” he says. “We’re also seeing rising M&A activity and increased share buybacks, both clear signs of undervaluation, alongside supportive signals from the government on pension reform that could channel institutional money into Aim.”

Guy Foster, chief strategist at RBC Brewin Dolphin, notes that US economic policy has indirectly benefited the pound, and that “a stronger pound is typically quite good news for small caps”. By the same token, he thinks the outlook for the US “seems more ambiguous” than it once was.

Even so, a significant risk for small caps is the domestic economy stumbling, or taxes increasing again for UK businesses, he adds.

Outperforming funds

Picking smaller companies is notoriously tricky, and few fund managers achieve consistent outperformance. We looked at the Investment Association and the Association of Investment Companies UK smaller companies sectors to hunt for those that have consistently outperformed over the medium and long term, filtering out those with less than £100mn in assets. The table below lists what we found.

Technically, just two funds in this table beat the index on each of the three longer time periods we look at: three, five and 10 years. But the other four came reasonably close. It is also worth noting that not all the funds use our chosen index as their own benchmark.

Choosing a small-cap fund is partly a question of how much risk you want to take in what is already a volatile, punchy sector. You should consider whether you want to take a punt on a concentrated fund or opt for something with a broader approach, and think how ‘small’ you want to get in your smaller companies’ exposure. The most concentrated funds, and those with high allocations to very small companies, are not for widows and orphans.

Strategic Equity Capital (SEC) is perhaps the raciest of the group. It only has 18 holdings, and its portfolio is also skewed towards the smaller end of the market cap spectrum – as at July 2025, some 35 per cent of its portfolio was in companies that are less than £250mn in size (note that it is difficult to compare market cap exposure among the different funds because they disclose it in different ways).

The trust has done incredibly well over the past five years, although its 10-year record is less outstanding. The idea is to bring a “private equity approach” to listed small companies: providing capital while also actively engaging with a company to improve its performance.

You really have to be comfortable with concentration with this trust because it can run its winners. For example, in the second half of 2024, it belatedly reduced a position in XPS Pensions Group (XPS) that had come to account for 22.9 per cent of the portfolio. With companies this small, liquidity is a huge consideration, and indeed the manager said the divestment was made possible by the additional liquidity afforded to the company when it joined the FTSE 250.

As at 29 August, the trust was trading at a discount to NAV of 7.5 per cent. It only has £175mn in assets, and shareholders will have a 100 per cent exit opportunity in November, which is likely to make it even smaller.

With 25 holdings, Rockwood Strategic (RKW) is also very concentrated, and half of its top 10 holdings are less than £200mn in size. It is the standout outperformer of the group; over the medium and long term it has even beaten the MSCI World index. It invests with a concentrated ‘value’ approach – Simon Thompson has covered the portfolio in more in detail here. Its impressive record means it is one of a handful of investment trusts trading at a premium to net asset value (NAV) (2.6 per cent as at 29 August). It is also very small, with £131mn in assets.

Less concentrated

The other four funds and trusts are less concentrated and bigger in size themselves, meaning there is less potential for liquidity issues. Aberforth Smaller Companies Trust (ASL) goes for a value approach and a tilt towards very small companies; it has 43 per cent of its portfolio in the FTSE Small Cap index, which comprises companies that are too small to be part of the FTSE 250.

Trading at a discount of 10.6 per cent as at 29 August, Kepler analysts note that it offers investors a “triple discount” – with its portfolio undervalued versus the market, smaller companies undervalued versus large, and the UK at a discount to global equities. This “adds to the value in the share price discount and points to ASL being a compelling value opportunity, in our view”, they say.

JPMorgan UK Small Cap Growth & Income (JUGI), the final investment trust of the group, instead has 58 per cent of the portfolio in companies with market caps of over £1bn. This is partly because the trust merged with its mid-cap-focused stablemate, JPMorgan Mid Cap, last year.

It offers an attractive 4.6 per cent yield, and since the merger its dividend policy aims to pay out 4 per cent of its NAV in dividends every year. This can be a compelling offer for income investors, giving them the chance to receive regular payouts from an asset class and strategy that are more growth-orientated.

Finally, of the two open-ended funds, Fidelity UK Smaller Companies (GB00B7VNMB18) also has a contrarian value tilt, but this hasn’t limited its returns. As FundCalibre analysts put it: “The fund is stylistic, and its outperformance tends to come in periods when value stocks are doing well. However, performance has also held up remarkably well when value investing has been out of favour.”

Meanwhile, the Artemis fund goes for a more “prudent” approach, seeking companies with solid balance sheets and “predictable and/or growing cash-flow streams which require little additional capital to sustain”, according to FundCalibre.