By Matteo Anelli, Senior reporter, Trustnet, 23 May 2025:
After a bruising few years, small-cap investing is out of favour but not out of opportunities. In the UK, some of the best-known small-cap names have struggled, including abrdn UK Smaller Companies, Liontrust UK Smaller Companies and IFSL Marlborough UK Micro-Cap Growth.
It’s no coincidence, however, that all three adopt a growth-focused investment approach, which did well when interest rates were low but faced heavy losses and outflows as rising rates hampered growth investments in 2022..
According to Jupiter Merlin’s David Lewis, one style has stood up better than the rest: quality..
Matthew Read, QuotedData senior analyst, had a different view. “Despite no shortage of headlines to the contrary, we do not think that the ‘small-cap effect’ is no longer valid, it’s just been obscured by a combination of flows, fashion, and fear. But that tide may be turning,” he said.
“Valuations are now at extremes and April’s moves show that when markets turn, they can move quickly. It doesn’t take much of a reallocation from mega-caps to shift the dial.”..
In contrast to the widespread, binary view of small-caps as either value traps or rocket ships, “quality does exist in small-caps, and it compounds over time,” Read noted.
Trusts such as Montanaro UK Smaller Companies and BlackRock Throgmorton are proof of this concept.
“Backing management teams who reinvest internally and generate cash at high rates of return in defensible niches is a winning formula,” Read said..
Read pointed more patient investors towards the Herald investment trust, an example of a strategy with the benefit of permanent capital, thanks to its closed-ended nature.
“This has contributed to its incredibly strong long-term returns,” he noted.
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