Get growth with this small cap gem

One area to consider is smaller companies, which over the long-term has historically outperformed (read our big theme). But this obviously relies on finding a manager who can pick the right shares, because as with all higher return investments, the downside can be severe. We already have two smaller companies funds in our IC Top 100 Funds, Standard Life UK Smaller Companies Trust and BlackRock Smaller Companies Investment Trust.

A third that's worth considering is Henderson Smaller Companies Investment Trust. This trust has out performed the NUMIS Small Cap ex IT index in eight out of the past nine financial years, and during the past year is the top performer out of 68 open and closed end UK small-cap funds. Since November 2002, when its current manager Neil Hermon has run it, the annualised outperformance of its benchmark (NUMIS Smaller Companies Index ex Investment Companies) and the FTSE All Share Index is 3.2 per cent and 8.1 per cent respectively.

Despite this, the trust can still be bought at a discount to net asset value (NAV) of more than 21 per cent.

Although discounts are a concern for some, where they are unjustified they could eventually close as investors realise the trust has some good attributes. "Notwithstanding an impressive absolute and relative performance record, the discount remains stubbornly wide and we regard this as an opportunity," says Alan Brierley, director, investment companies at investment bank Canaccord Genuity.

The trust invests in high-quality smaller companies with strong growth potential, and may continue to hold a company even if its market cap becomes so large it is no longer classified a smaller company. The trust's manager considers investments as long term to avoid unnecessary turnover, and has focused on adding companies with sound financial characteristics and strong management, but with valuations that do not reflect these strengths. Shares which fail to meet these criteria are sold.

Henderson Smaller Companies has a very reasonable ongoing charge of 0.52 per cent, the cheapest in its sector, UK Smaller Companies, according to Morningstar.

Over three and five years this trust has not done as well as some of its sector peers such as Standard Life UK Smaller Companies and BlackRock Smaller Companies. But Mr Brierley says:

"Historically the relative performance of Henderson Smallers has been correlated with the fortunes of its underlying universe. But notably, given the more difficult conditions (particularly during the first quarter of the financial year when the benchmark experienced an 18 per cent peak-to-trough fall), a relatively higher beta style and reasonable levels of gearing (£20m 10.5 per cent 2016 debenture), the manager still managed to comfortably out perform its benchmark: the NAV total return in the financial year was -5.1 per cent vs. -7.7 per cent."

So with the lowest TER and a wide discount to exploit, this trust is a buy.

Source: Morningstar & *Henderson. Performance data as at 31 August 2012

Top 10 holdings as at 31 July 2012

Sector breakdown