Good things come in smaller Japanese companies

If you're looking for a slice of the action don't overlook small caps. It's a sector that's underplayed and under-researched - and has potential for value in large helpings.

Baillie Gifford Shin Nippon (BGS) is head and shoulders above the other five Japanese small-cap investment trusts in terms of performance, making it the best of a rare breed of trusts. It has standout returns over one, three, five and even 10 years and has consistently beaten its benchmark, the MSCI Japan Small Cap Index.

Not only has it outperformed, but it also has the cheapest fees, with a net expense ratio of 1.49 per cent. Compare this with JPMorgan Japan Smaller Companies Trust (JPS), which has a 1.92 per cent fee, Fidelity Japanese Values (FJV) at 1.98 per cent and Prospect Japan (PJF) at 2.27 per cent and Shin Nippon's value shines through.

Investing in under-researched companies in an uncertain economy might feel like dipping your toe in a snake pit, but the experience of the management team is the linchpin of this fund's success and is solid enough to be reassuring, according to Peter Walls, director at Unicorn Asset Management, who runs an open-ended fund that invests in investment trusts.

The fund's manager, John MacDougall, has been running the fund since 2007 and has consistently trumped every other investment trust in the sector. Mr Walls says that, while most other managers of Japanese funds only see large-cap companies as an option, Mr MacDougall has an unusual talent for spotting growth opportunities in small-cap companies.

The fund is trading on a 4.91 per cent premium, which might make you wary, but Mr Walls says this should not put you off because the underlying assets are such good value for money.

The fund plays on Japan's elderly and ageing population with a heavy weighting in healthcare, and is also actively seeking emerging businesses with an online focus. It has had huge success with online machinery provider MonotaRO (its largest holding) and Next, an online property website.

It's a relatively small fund with a market cap of just 95.72m, but there have been rumours circulating that it has plans to raise new capital in the near future - and this could present a good opportunity for investors if these prove correct.

The risk of hyperinflation in Japan as a result of extreme fiscal policies is the biggest threat to the fund, but Mr Wall says that, if this does happen, the whole world will follow suit so your money would suffer wherever you invested. While no one can be certain what the Japanese economy has in store for it, we think this fund is a cracking option for a long-term play. Buy.