Fund Spotlight: a fund finding hidden gems in the UK

While the market’s focus understandably continues to centre on US equities, the performance of UK small caps throughout 2024 and so far in 2025 has been decent and valuations have risen from the depths of 2022.

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Still, the discrepancy between valuations of listed UK small- and large-cap shares (both UK and global) has actually grown and outflows from UK companies have continued.

It’s easy to understand this selling pressure. For one, UK small caps have fallen foul of the broader diminishing role of UK equities in global equity markets, with the UK now forming barely 3% of the MSCI All County World Index, while the US allocation is ever more predominant.

It also reflects more specific macroeconomic concerns, such as the pressure that (still) high interest rates typically levy on smaller companies and the perception of a weak growth outlook for the UK economy, as well as unwelcome political developments such as national insurance hikes and uncertainty ahead of the Autumn Budget.

However, despite the malaise of outflows, undervaluation and pessimism, Britain is home to a raft of quality companies, with many of the most innovative and promising naturally found amid the smaller echelons of the stock exchange.

Investors may be overlooking the valuation opportunity across UK small caps, and the fervent takeover and private equity activity across the UK (typically at premium valuations to those reflected in the public market) is testament to the value perceived to be on offer by certain institutional investors.

The environment for asset managers in this space has been torrid.

Of the 44 funds in the Investment Association’s (IA) UK Smaller Companies Sector, only seven have managed to attract positive flows through 2025 so far. One of these funds is the WS Gresham House UK Smaller Coms C Acc fund, which stands out also for its impressive track record of performance in its peer group over the longer term.

What does the fund invest in?

The fund invests in a portfolio of 40 to 50 UK-listed smaller companies with a market cap of £250 million to £1 billion. Launched in 2019, the fund is managed by Ken Wotton, supported by the public equities team (of which he is the head) and the broader strategic equity team.

Gresham House is a specialist asset manager. Rather than spreading across numerous asset classes, Gresham House focuses on two areas: real assets, and strategic equity, which spans early stage unlisted companies to small and mid-cap public companies in the UK.

They apply a private equity approach to due diligence, investment selection and engagement to the public markets as well as leveraging their private equity experts and network to affirm conviction.

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The managers focus on finding well-managed, high-quality companies – strong profit margins, earnings growth, cash generative and minimal leverage – trading at reasonable valuations, and pay little mind to benchmark allocations.

Business services (44.8%) and consumer (20.5%) sectors make up a fair share of the fund and the portfolio exhibits a relatively core style, with a marginal bias towards growth. The fund is heavily weighted to the smallest end of the market cap spectrum, with over a third of the fund in AIM-listed companies, and another quarter in FTSE Small Cap names.

Amid some familiar names across the fund’s holdings, such as Trustpilot Group (LSE:TRST), Moonpig Group Ordinary Shares (LSE:MOON) or Brooks Macdonald Group (LSE:BRK) are less well-known names.

For example, top holding, Everplay Group (LSE:EVPL), is an indie video game developer and publisher, with a market cap of around £500 million, whose share price has excelled over the past year, supported by an upgrade to full-year guidance.

How has the fund performed?

The WS Gresham House UK Smaller Companies Fund has an enviable track record among its peer group with returns being in the top 25% over three and five years. Since the fund’s launch in early 2019, it has returned just under an annualised 10%, which is well over double the average return of the funds within its IA UK Smaller Companies peer group.

Relative and risk-adjusted returns versus both peers and versus a relevant benchmark (Numis Smaller Companies Ex Investment Trusts) have been consistently strong. However, it’s worth noting that returns in recent months, while positive, have been less remarkable given a general outperformance of value style investing.

Source: Morningstar Total Returns (GBP). Past performance is not a guide to future performance. 

Why do we recommend this fund?

The Gresham House UK Smaller Companies fund offers a differentiated and highly active approach, backed by expertise and dedication within the realm of UK small-cap investing.

The fund’s approach has proven itself over its lifetime, and across differing market environments, such as the global bull market of late 2020 into 2021, and the drawdowns of 2022 when interest rate hikes and geopolitical chaos put immense pressure on small-cap funds and indices alike.

Small-cap investing is an inherently risky pursuit and investors should be prepared for generally a higher degree of volatility when allocating.

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While there are clear tailwinds for the sector, the outlook for the UK as a whole is uncertain and the UK faces various challenges in the near and long term. That may incline investors towards managers such as Gresham House that have been able to generate outperformance even amid periods of weaker investor confidence and uncertainty.

Given the sensitivity of small-cap stocks to higher interest rates, the focus on profitable and unleveraged companies may provide a degree more resilience, while the private equity focus Gresham House apply ought be an asset in the current environment given the scope for rapid re-rating of stocks and sectors as private buyers step in to capitalise on undervalued public market opportunities.

The fund is available with a yearly ongoing charge of 0.82%.

The fund does not form part of ii’s Super 60 or ACE 40 rated lists.

The latest factsheet can be viewed here.