BlackRock Smallers stays small to be mighty

"Most of our new investment goes into companies capitalised at less than £1bn," he says. "But when we have a winning company we like to hold on to it and add to those stakes as time goes by and our confidence goes up, so we will run companies up to the FTSE 100.

"We have held companies such as Ashstead (AHT) and Hargreaves Lansdown (HL) in the past and sold them when they made it into the FTSE 100. We can invest in new holdings of companies with a market cap up to £2bn, so we have a lot of freedom but prefer to look for the slightly less well-known companies."

At the moment, Mr Prentis holds 10 per cent of the trust's assets in "truly micro-cap stocks" with market caps of less than £150m and says he has "considerably less than some other small-cap trusts" in mid-caps, roughly 40 per cent of the fund.

He is a true champion of small-caps, which he thinks are inherently far less risky than people think. "The market believes that smaller companies are riskier because they are small, but the funny thing about many small companies is they're not risky," he says. "They often have good management teams able to manage well because the businesses are not too amorphous they can be quite fleet of foot. They are often very cash-generative and have very strong balance sheets, which some of the largest companies in the FTSE don't."

The trust has beaten the FTSE 100 and its benchmark, the Numis smaller companies Aim ex investment companies, returning 83.3 per cent over three years, compared with 39.5 per cent from the benchmark.

Smaller companies funds have generally been holding their own in recent market volatility. While China, emerging markets and Europe tanked in 2015, the UK Smaller Companies Sector ploughed onwards and upwards. The Association of Investment Companies' UK Small Companies sector average pulled away dramatically from a raft of sectors, including the UK All Companies, UK Equity Income Sector and Global sectors in June, and is now riding above them.

"The great thing for the UK consumer is that they have more money in their pockets," says Mr Prentis. "So the better companies supplying them are doing very well." Those include JD Sports (JD), which, he says "is doing very well in the UK and is radically increasing its footprint in continental Europe".

Mike Prentis CV

Mr Prentis also invests in companies on the Alternative Investment Market (Aim), where he says he finds some of his favourite companies, including the fund's largest holding.

"CVS (CVSG) is the UK's leading vet surgeries business, with more than 300 surgeries in the UK. It has been a fantastic performer for us over the past year." Other favoured Aim stocks include pharmaceutical company Clinigen (CLIN) and medical software company EMIS (EMIS), a healthcare software company that is quite a big holding. "These are really good companies, very profitable, and some of them have got really unique technology, so they tick all the boxes for us. We like to hunt for the best companies whether fully listed or listed on Aim."

"It's harder to find good valuations now because markets have moved up, so there are fewer stocks on low price-earnings (PE) ratios. But I think there are a series of metrics we need to consider not just the actual PE ratios.

"And in smaller companies what you learn is that when you have a winning company you don't want to focus too much on valuation because if you start taking profit too early you miss out on a real winner."

In fact, even a recession wouldn't phase Mr Prentis. "Of course, come a recession smaller companies are more vulnerable to orders being deferred or destocking and that's why they tend to suffer more in share price terms," he says. "But operationally for many smaller companies, a recession is a great time to gain market share, sort themselves out and take out cost and that's exactly what we saw in the last one."

"Over the past 10 years the net asset value (NAV) of the trust went up more than threefold and those years included the worst recession ever known, so if you take a long-term view a recession shouldn't impact on the value of your investment too badly," he says. However, he admits: "If you get your timing wrong you can lose money."

BlackRock Smaller Companies performance (% total return)

Source: FE Analytics, as at 16 October 2015