Fund Focus: a small pocket of value

It has felt dangerously easy to make money in the last year, with markets posting big gains in the face of investor worries. 

Emerging market equities are up by around a third over the 12 months to 24 July 2026, with Japan up by a quarter and the FTSE 100 by a fifth. 

The MSCI World index, S&P 500 and the FTSE Europe ex UK are not far behind, either.

To their credit active funds have made big gains too, at least if we look at the average returns from different sectors. 

But such successes beg the question: what’s still cheap and where is there still value? 

Most regions are well up and even value funds are riding their own wave of momentum, making the big winners of the future difficult to spot.

As discussed before we can look at those areas that seem boring, pounce on bombed-out sectors such as software, or dig around in an investment trust sector still bothered by discounts.

But don’t forget that one part of the market is still lagging behind, if not exactly doing terribly.

Little wins?

One winner of the last year has been the US smaller companies sector. 

Hit especially hard by Donald Trump’s “Liberation Day” announcements back in April 2025, US small-cap shares have done some big numbers as of late.

That bucks a trend where smaller companies have tended to lag their bigger peers by a wide margin – be it in Asia and the emerging markets where behemoths like Taiwan Semiconductor Manufacturing Co Ltd ADR (NYSE:TSM) have lots of momentum, in the UK where the FTSE 100 has had a strong few years, or in Japan and Europe.

This can be seen on a fund level in the table below. To illustrate the disparity I’ve looked at the average returns from AIC sectors, given that small-cap funds are separated out from more generalist names.

We should of course caveat that the small-cap sectors tend to have very few constituents - meaning the averages mask plenty of nuance.

 As the table shows US small-cap trusts are not, on average, that far behind those focused on bigger companies. 

We’ve also seen a strong performance from the Global Smaller Companies group, which has just four constituents but will have enjoyed the roughly 30% return from early Space Exploration Technologies Corp Class A (NASDAQ:SPCX) holder Edinburgh Worldwide Ord (LSE:EWI).

But smaller companies still have plenty of catching up to do if we look elsewhere. The average Japanese small-cap trust has returned around 10% in a year, well behind the monumental gains of its bigger brother.

Similarly UK and European smaller company funds are sitting on relatively tame average returns – at least in the context of the unusually strong performance of this period.

Standout names, and some notes of caution

Before we continue let’s walk through some of the usual health warnings. 

Smaller companies are pretty risky, can be a niche part of your portfolio, and should generally not sit on that big a position size unless you are very happy with risk. 

But they might add some diversification in an era where many markets (especially the US and Asia) are dominated by a handful of large-cap names associated with artificial intelligence (AI). And in theory they promise good long-term returns.

As mentioned some of these AIC sectors are pretty small, and if we look beyond the average returns there are some interesting nuances. Let’s take Japan, where both Nippon Active Value Ord (LSE:NAVF) and AVI Japan Opportunity Ord (LSE:AJOT) have capitalised on a story of corporate reform by taking big stakes in companies and agitating for change.

It’s interesting to note that AVI Japan Opportunity, a big winner of recent years, has had a tough 12 months. 

It’s slightly down over that period, with the trust’s shares trading on a 4% discount to net asset value (NAV). 

A May update for the fund noted that a narrow rally in AI and semiconductor-related stocks had driven performance in Japan, “creating a difficult backdrop for strategies like AJOT, which don’t typically invest in those sectors or high-growth companies”.

The Asian Smaller Companies sector, which again has just three members, has seen some dramatic differences in fortune. 

Aberdeen Asia Focus PLC (LSE:AAS) is sitting on a 29% return, while at the other end of the spectrum, Scottish Oriental Smaller Cos Ord (LSE:SST) is down by 15% or so.

It’s worth noting that small-cap funds won’t totally avoid excitable trades such as AI, though they may access it in an indirect fashion. 

Aberdeen Asia Focus recently noted that of its top 10 holdings, Hansol Chemical, had enjoyed a 6.5% increase over a month because its core business “continued to benefit from increased memory wafer production”. That same company was the top holding for Scottish Oriental Companies.

Closer to home

I’ve written before about the UK small-cap sector, and how some very concentrated funds with activist tendencies have done the best in recent history. 

Though if smaller companies have lagged somewhat, we shouldn’t forget that mid caps are the real laggard in the UK.

If we turn to the Continent, small-cap funds can still tap into some growth trends even if they seem unexciting. 

The European Smaller Companies Trust PLC (LSE:ESCT), which has performed well in recent years on top of shaking off the US activist Saba, has exposure to the defence spending theme via shares like Spain’s Indra Sistemas SA SHS Class -A- (XMAD:IDR) and has quite a spread of other exposures, from trading platforms to online clothing retailers. 

Meanwhile rival fund Montanaro European Smaller Ord (LSE:MTE) has had a tougher time.

Small caps, again, are not without risk. But they might add something extra for those struggling to find value, or diversification.