Investors often gravitate to large, well-known funds with recognisable brand names. There is security in familiarity. However, smaller, under-the-radar funds can pack a big punch. More nimble than their larger peers, they can reach parts of the market that others cannot.
There are sound reasons to invest in a small fund rather than a large fund. Small funds can be more agile. For a £2 billion fund, a 5% holding is equivalent to £100 million. That’s fine if a fund manager is investing in a large-cap company or in very liquid markets such as the US. However, if they want to invest in, say, smaller companies or emerging markets, it can become a problem.
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For example, even at the smaller end of the FTSE 250, the market capitalisation falls to below £500 million. A £100 million investment means taking a fifth of a company’s issued share capital. Unit trusts have limits on how much they can hold in a single stock, designed to limit risk. So for larger funds, it becomes unrealistic. Small funds have no such restrictions, giving them greater flexibility and allowing them to probe the corners of global stock markets that may have been neglected by other investors.
This can be a real advantage. Larger companies are often widely analysed. As such, it’s more difficult for fund managers to get differentiated insight into their long-term prospects. There is often more mispricing among smaller, overlooked companies, and this is where active managers can really add value.
Another advantage of investing in smaller funds is that they are often relatively new. The fund manager still needs to build a track record and gather assets. This can be a strong motivator. It helps ensure the fund manager’s objectives are fully aligned with those of their investors.
There is also a natural risk discipline in investing in smaller funds. If a fund has got very large, the chances are that it is in a popular part of the market – North America, for example, or technology. That can mean that you’re catching the end of a wave, rather than the beginning. Smaller funds may be in overlooked areas.
Four smaller funds worth considering
One option from the Chelsea Selection would be IFSL Pinnacle Life Cycle Global Equity Income. At £131 million, it was launched in March 2025 by a team newly moved to Pinnacle from Royal London. They had achieved great success at Royal London with their “Life Cycle” process. It has a long track record of working consistently over time. Investors would be getting in at the beginning of a potentially exciting story.
The Comgest Growth Europe ex UK fund, at £91 million, is another example. The investment process is used across the company and has a strong track record over more than 30 years. The group are firmly long-term and happy to stand apart from the market. This contrarianism means that performance can be ‘lumpy’, with periods of weakness followed by periods of strong performance. Its ‘quality growth’ style has been significantly out of favour, and we believe it may be a moment to have another look.
Size is particularly important in smaller companies, and particularly in the UK, where liquidity can be patchy. The Liontrust UK Micro Cap fund is investing in small and innovative UK companies and is just £50 million in size. It is run by one of the best small-cap teams in the business, led by Anthony Cross. The team’s natural focus on ‘quality’ metrics reduces some of the risks associated with investing in smaller companies.
In its recent update, the team says that recent earnings reports from the portfolio holdings have been strong, and there have been a significant number of companies either buying back shares or with insiders buying shares, “a further validation of attractive valuations and confidence in the underlying fundamentals. The portfolio continues to trade at a valuation discount to the UK market despite displaying returns on capital twice that of the wider market, higher margins and significantly lower balance sheet leverage.”
Another minnow worth a look is FSSA All China. It’s just £19 million in size, but the team behind it has a strong track record of investing in Chinese equities and is based on the ground in Hong Kong. The fund is flexible and more dynamic than its competitors, and its ability to invest in the local A-Shares market gives it access to a wide range of opportunities.
Investors can be well-served by looking at under-the-radar funds, rather than their larger peers. Great things can come in small packages.
