Look at the investment trust space if you want to outperform the market when it comes to investing in UK smaller companies.

Using data from FE Fundinfo, Shares compared the sector performance to the FTSE All-Share and the Numis Smaller Companies indices.

Only seven out of 17 open-ended funds in the UK Smaller Companies sector have beaten the market over the past five years, according to analysis by Shares. Investment trusts fared a lot better, with 17 UK small cap collectives outperforming.

The poor showing from open-ended funds comes as a surprise given that small caps are often considered to be a part of the market where fund managers can truly add value through expert stock picking. Companies are often under the radar and so truly active fund managers can potentially spot great opportunities if they put in the hours to research the market.

TOP FUND

The FTSE All-Share returned 25.7% over five years while the Numis Smaller Companies index returned 28.1%. While that is almost in line with what you might expect to make from UK equities based on historical returns, the success achieved by the top performing actively managed funds and trusts in the sector illustrate how it is possible to achieve considerable excess gains.

In the funds space, FP Octopus UK Micro Cap Growth (BYQ7HP6) returned just over 100% over five years, and 241% over 10 years. Asset manager Octopus argues that smaller companies grow faster. ‘That means share prices have a better chance of increasing at a faster rate over the long term,’ it adds.

Launched in 2007, the Octopus fund holds 88 companies in such sectors as support services, media and construction. The portfolio is constructed around a core of profitable cash generative businesses with experienced management teams and surrounded by stocks that can be categorised as higher risk growth.

Other funds at the upper end of the league table include LF Gresham House UK Micro Cap (BV9FYS8) which has returned 77% over five years and 368% over 10 years, the latter significantly ahead of the broader market.

Gresham House looks for six key areas when assessing potential investments: entrepreneurial managers, strategy, market opportunity, market position, valuation and financials. The latter includes earnings potential, quality of earnings and balance sheet strength.

Its portfolio currently includes various consultancies including XPS Pensions (XPS), Mattioli Woods (MTW:AIM) and Inspired (INSE:AIM), as well as consumer, tech and healthcare companies.

TOP TRUST

BlackRock Throgmorton Trust (THRG) is the top performer for UK smaller companies-focused investment trusts on a five-year basis, returning 110%. Close behind is JPMorgan UK Smaller Companies Investment Trust (JMI) with 107%  total return.

Throgmorton is indicative of several trusts whose portfolios contain quite a few larger companies than one might associate with the small cap space. It is upfront with this approach, saying mid-caps are part of the overall investment focus.

That explains why its portfolio features such names as £2.9 billion Watches of Switzerland (WOSG), alongside smaller companies such as £500 million construction group Sigmaroc (SRC:AIM) and £405 million mobile payments provider Boku (BOKU:AIM).

Among the worst performing funds in this space is Sarasin UK Thematic Smaller Companies (B7XS1T5) which has only returned 2% in the past five years, significantly underperforming the broader market.

Looking at the performance chart, it seems as if the fund has been left behind since Covid struck with its portfolio struggling to recover from the February/March 2020 global equity markets sell-off.

Its top 10 holdings are mainly mid-cap stocks including retailer WH Smith (SWMH), online fashion specialist ASOS (ASC) and student accommodation provider Unite (UTG).

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