Fund managers’ favourite UK smaller companies

Professional fund managers, in theory, should have an edge when it comes to buying smaller companies. This is because their teams of analysts can uncover hidden gems that are ignored by market-cap weighted indices, leading to potentially superior returns over the long run if they pick enough winners.

• Invest with ii: What is a Managed ISA? | Open a Managed ISA | Transfer an ISA

Smaller companies can also be faster growing and in emerging industries, which can lead to better capital growth – albeit with more volatility – than larger firms. Nevertheless, UK smaller companies have lagged their large peers recently, with interest rate rises proving a headwind.

Over the past five years, the FTSE 100 has delivered a total return of 74%, while the Deutsche Numis Smaller Companies plus AIM (excluding investment trusts) is up just 44%. This may suggest that smaller shares are due a recovery, particularly given that interest rates are now declining.

• 12 investment trusts face continuation votes
• Five ways to invest in US outside of traditional tracker funds

Following what professional stock pickers are investing in can provide useful inspiration for DIY investors.

New research from the Association of Investment Companies (AIC), analysing the holdings of 22 investment trusts in its UK Smaller Companies sectors, reveals 39 companies that are popular with professionals.

Annabel Brodie-Smith, communications director at the AIC, says: “Smaller companies are far less researched than large caps, and investment trust managers are well placed to spot future winners. That’s because they spend their days scrutinising the business and its competitors in addition to meeting the management face-to-face and asking questions before they commit any money.”

The most popular smaller firms

Source: theaic.co.uk/Morningstar (based on latest available portfolio information as at 09/05/25). Shows all companies held by at least five trusts in the AIC UK Smaller Companies sector.

The joint most-popular company is XP Power, which manufactures and supplies power control systems for various industries, such as healthcare, industrial technology and semiconductor manufacturing equipment.

One investor is Stuart Widdowson, manager of Odyssean Investment Trust. He says that like its peers, it is going through a periodic industry downturn, which is longer than historically has been the case.

However, he argues that a recovery is due, saying: “We have seen this before and the market recovery when it comes is likely to be very strong. Over the long term, the company’s sales have grown at almost 10% per annum across the cycle.

“The business model is highly cash generative. Its closest peer, which trades on Nasdaq, is valued at almost double XP’s rating. This peer launched a hostile takeover attempt last year at a price more than double the current share price. Given the limited liquidity of XP’s shares, an investment trust represents an optimal structure for holding this company, as it allows for long-term ownership without being forced to sell at depressed valuations and low sales multiples.”

Another other top-ranked UK smaller company is 4imprint, a printed items and corporate gifts firm, held by eight investment trusts. 

• The 20 most-popular dividend shares among UK fund managers
• Sign up to our free newsletter for investment ideas, latest news and award-winning analysis

Georgina Brittain, co-manager of JPMorgan UK Small Cap Growth & Income (LSE:JUGI), says that with a market share of around 5%, 4imprint is still the market leader in promotional gifting in the US and is growing rapidly in the UK.

She adds: “Currently buffeted by concerns over the US economic environment and the potential tariff impacts, we expect 4imprint to prove itself a long-term winner, as it has in the past. The company has experience of previous downturns and indeed of the impact of US tariffs, and has a playbook of how to manage them, such that it is well positioned to benefit coming out the other side.”

Charles Montanaro, portfolio manager of Montanaro UK Smaller Companies (LSE:MTU), has a stake in Harry Potter publisher Bloomsbury Publishing, which is held by seven trusts.

He said: “It is the only UK-listed publisher to combine general and academic publishing under one roof – a strategic advantage that brings stability and resilience. Academic publishing, with its recurring revenues and strong margins, helps offset the more volatile nature of trade publishing.

“Bloomsbury has a remarkable ability to spot talent early: the charismatic and exceptional Nigel Newton, founder and chief executive, was the first to spot and back J.K. Rowling and Bloomsbury now owns the UK rights to the most successful children’s franchise in history. Today, Sarah J. Maas is emerging as the company’s next blockbuster author, with Bloomsbury holding global rights across all formats.”