“Cheap and unloved” is not the most flattering description of any asset class, but it is one that has been attached to UK small caps on numerous occasions. The companies themselves haven’t done much to deserve this contempt, at least in sum. In fact, they’re arguably victims of political and geopolitical forces outside of their control.
Brexit and the 2022 'mini' Budget, for instance, didn’t exactly do much to boost investor confidence in the UK. At the same time, pension schemes have been pulling away from equities in favour of lower-risk assets. It’s hardly a surprise that the AIC’s UK Smaller Companies sector – a cohort of 24 funds – is trading on a weighted average discount of almost 12 per cent.
In this environment, it isn’t always easy to tell a value trap from a genuine underdog. It is possible, however, to look at a fund or investment trust's performance history and its current portfolio to form a view of its future potential. Over the medium term, it’s particularly notable that some trusts that take a private-equity-style approach to investing in listed companies have outperformed. If nothing else, this proves there’s still value to be found in the UK market – if managers know where to look.