The smaller company funds with an edge

Those who have spent years investing in funds have likely heard the same bold claim a few times: that now is (finally) the time for stock pickers to return to form versus the index.

Especially in concentrated markets such as the US, such outperformance has nevertheless remained elusive for many.

• Our Services: SIPP Account | Stocks & Shares ISA | See all Investment Accounts

It therefore makes a little sense if we feel slightly weary, and cynical, when it comes to such claims. But if passives remain hard to beat, which areas might lend themselves more to an active approach?

One plausible argument is that stock pickers fare better in the smaller companies space, given that it’s a less well researched and a fundamentally more inefficiently priced sector.

Active funds also have much less competition from trackers on this front, although their own results can be pretty mixed.

Here, we look at some of the leading lights by recent performance – and note some stark differences between the leaders and laggards.

Good news and bad news

If we look at the UK, active small-cap funds have operated in a troubled market in recent years but have also largely struggled to even beat that market.

The FTSE Small Cap index has made a relatively modest 27.8% return over five years (all data to 27 April 2026), while the buoyant FTSE 100, by contrast, has made almost 80%.

Many funds, however, have struggled to beat this. Just four funds out of around 60 in the Investment Association (IA) and Association of Investment Companies (AIC) UK Smaller Companies sectors have beaten it over that five-year period. 

One of those, Crystal Amber Ord (LSE:CRS), is in the late stages of a wind-down process with just one holding left in the portfolio.

Source: FE Analytics, 27/04/26. Past performance is not a guide to future performance.

But if we are comparing these funds with the market, we should stress that it’s hard to focus purely on smaller company shares using passive funds.

Two names stand out here: the iShares MSCI UK Small Cap ETF GBP Acc GBP (LSE:CUKS), which features a mixture of FTSE 100 and FTSE 250 constituents in its top 10 holdings list, potentially for liquidity purposes, and the Amundi Prime UK Mid & Small Cap ETF DR D (LSE:PRUK). 

If we compare active funds with these, then around 10 stock pickers are ahead of the passive competition over the last five years.

What’s interesting about the leading active funds is that they tend to have a very distinctive and pretty risky approach. That has paid off in recent history but it’s not for the faint-hearted.

Fortune favours the bold

There’s a common thread among some of the top names in our table: they run very concentrated portfolios, have big stakes in companies and often tend to have a hands-on approach with such companies, including bidding management to enact changes they view as necessary.

Rockwood Strategic Ord (LSE:RKW), which has nearly doubled investors’ money over five years, ticks these boxes. 

It’s relatively concentrated with a 9.6% allocation to top holding RM (LSE:RM.), and more than 7% apiece in the next two largest positions, Vanquis Banking Group (LSE:VANQ) and Capita (LSE:CPI). 

The team looks to have between five and eight core holdings, with the top 10 positions likely to make up most of the portfolio, and looks for “proven businesses and opportunities for strategic, operational or management change to unlock shareholder value”.

The investment team used its March update to bemoan the fact that the Iran war had upset markets at a time when many of its portfolio companies had enjoyed significant progress, including Capita’s decision to dispose of its loss-making private contact centre business for a nominal £1. The Rockwood Strategic team said this was “a critical strategic decision we have engaged management on”.

• Fund Focus: why this tech investment trust has pulled ahead
• Insider Interview: how this dividend hero delivers a market-beating yield

Rockwood Strategic also classes itself as a value investor and its holdings span a few different sectors. 

RM operates in education services, providing technology and other resources to schools, Capita is perhaps one of the fund’s better-known names via its activities as an outsourcer (and some related controversies), while Vanquis Banking Group and another holding, Funding Circle Holdings (LSE:FCH), are very different finance plays. 

The fund also holds names such as Videndum (LSE:VID), which focuses on media equipment, and the communications firm M&C Saatchi (LSE:SAA).

Marwyn Value Investors Ord (LSE:MVI), the second top performer if we exclude Crystal Amber, likes to “work in partnership with exceptional industry executives who bring long-standing industry experience and operational expertise”, and tends to have partnership with said management teams. The fund is also a backer of listed acquisition companies.

If we look at the fund’s literature, it’s certainly concentrated, with Zegona Communications (LSE:ZEG) making up almost a third of the portfolio. InvestAcc Group Ltd Ordinary Shares (LSE:INAC) meanwhile makes up roughly a quarter of the fund.

Meanwhile, Odyssean Investment Trust Ord (LSE:OIT) is another name with big bets, including a 14.6% allocation to XP Power Ltd (LSE:XPP) and around 10% in NCC Group (LSE:NCC). The investment team, again, likes to have big stakes in companies and agitate for changes that could drive better returns. Strategic Equity Capital Ord (LSE:SEC), also in the table, has a similar approach.

Can you go less punchy?

Concentration tends to be something of a dividing line for smaller company funds, with some names like those above having very big positions while others tend, instead, to have lots of small positions.

Fidelity UK Smaller Companies W-Acc (B7VNMB1), which has 105 holdings, sits in the second camp. Its top holding DCC (LSE:DCC) makes up just 3.8% of the fund, and its top 10 positions only account for a quarter of the portfolio.

The team likes to back companies it sees as “undervalued with recovery potential not fully recognised by the market”, with top holdings including Chesnara (LSE:CSN), Jupiter Fund Management (LSE:JUP) and Serco Group (LSE:SRP). 

• Ian Cowie: why I prefer investment trusts over funds
• Sign up to our free newsletter for investment ideas, latest news and award-winning analysis

However, when funds have small position sizes it can be more instructive to look at their big sector weightings.

In this case the fund has lots of exposure to industrials and consumer discretionary shares.

Those interested in the holdings that often crop up in some of these funds can look at our piece assessing some of the popular names from earlier this year.