Ian Cowie: this area of the market’s bouncing back

More than a quarter of the small businesses that shared £1.1 billion in loans from the government five years ago have gone bust already, according to new figures from the Future Fund, set up by Rishi Sunak when he was chancellor. Optimists point out that this means nearly three in four of the corporate tiddlers that pocketed taxpayers’ cash still seem to be standing but it does demonstrate the difficulties of investing in smaller companies. Not every acorn grows into an oak.

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Fortunately, a wide range of investment trusts provide cost-effective ways to diminish these risks by diversification and professional stock selection. But it’s only fair to admit that many returns have been rotten for years, before their recent bounce back.

The popular success of tracker funds, following stock market capitalisation-weighted indices dominated by bigger companies, have starved these tiddlers of capital in recent years. But a trend is only a trend until it stops.

So, this contrarian continues to hold a selection of smaller companies investment trusts, focused on different markets around the globe, with differing experiences of failure and success. Few provide a more dramatic example of their recent return to favour than Baillie Gifford Shin Nippon Ord (LSE:BGS), the Japanese small-cap specialist, whose share price has bounced 17% higher since the start of this year.

Better still, BGS has surged 24% higher over the past 12 months but the fact that its five-year return is only 28%, following 61% over the decade, serves as a reminder of its medium-term misery. This £454 million fund is doubly unfashionable, being based in an out-of-favour sector and run by an unfashionable growth-focused manager.

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Even so, underlying holdings include Tsugami Corporation, which makes automated machine tools that make other machines; GA Technologies, that operates an online platform for estate agents; and Infomart Corporation, a Tokyo-based business-to-business (B2B) e-commerce specialist. That’s not the sort of stuff many individual investors could access directly.

So, despite a negligible dividend yield of 0.45% with no five-year track record of rising income, this long-term investor is willing to pay annual charges of 0.8% for international diversification via shares priced 10% below their net asset value (NAV). I’m old enough to remember when many people believed that Japan was the future, and perhaps it might be thought so once again.

Closer to home, European Assets Ord (LSE:EAT), focused on continental medium-sized and smaller companies, is enjoying an even bigger bounce back; trading 18% higher than it did on 1 January. That reflects enthusiasm for an agreed merger with The European Smaller Companies Trust PLC (LSE:ESCT), where both sets of shareholders will be invited to vote next month, with the deal due to complete before the end of October.

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I will certainly vote in favour, having endured dismal long-term returns that news of the merger has perked up to 21% over the past year, following 33% over five years and 67% on the decade. Even EAT’s 5.8% dividend yield, albeit with negligible income growth, was modest compensation for capital shrinkage or stagnation. Charges of 1.01% are also on the high side but the managers propose they will be cut by the merger.

Elsewhere among my small-caps, the outlook has been confused by US President Donald Trump and almost daily about-turns on fiscal policy. For example, the principal attraction of the global smaller companies specialist, Edinburgh Worldwide Ord (LSE:EWI) is that more than 14% of its £778 million assets are invested in two tranches of Space Exploration Technologies shares; which is possibly the world’s most valuable unlisted company.

As discussed here before, SpaceX has more than 8,000 satellites in orbit and - via its subsidiary Starlink - could, potentially, replace every internet services provider (ISP) on this planet. But its chief executive, Elon Musk, has fallen from favour with Trump and EWI shares are currently down 2% year-to-date.

Over the short to medium and long term, total returns are a positive 28%, after -30% and plus 99% over the usual one-, five- and 10-year periods. It’s been a bumpy ride, with no dividends for comfort, but modest charges of 0.76% for extraordinary assets look reasonable and I intend to hang on.

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Similarly, the self-descriptive JPMorgan US Smaller Companies Ord (LSE:JUSC) has also been battered by the backlash against Trump tariffs and his former friends. Total “returns” have seen shrinkage of -16% since 1 January 2025, with -1.9% over the past year, following a positive 41% over five years and 147% over the decade.

Worse still, I picked JUSC for a “guess the best shares for 2025” parlour game, which just goes to show the reputational risk of taking a few punts for short-term fantasy fund management. But this long-term reality investor of my own life savings continues to believe there is a place for smaller companies in a diversified portfolio.

Having said all that, I’m jolly glad I never followed the Future Fund into Bolton Wanderers Football Club or the Killing Kittens sex party organiser, other than as a UK taxpayer.

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.

Ian Cowie is a shareholder in Baillie Gifford Shin Nippon (BGS), European Assets Trust (EAT), Edinburgh Worldwide (EWI) and JPMorgan US Smaller Companies (JUSC) as part of a globally diversified portfolio of investment trusts and other shares.