Over the longer term, UK small caps have historically outperformed their larger cap brethren, but prevailing investor sentiment towards smaller companies remains poor due to stubborn inflation, higher interest rates and recessionary fears. It won’t be like this all the time.

One smart way to gain exposure to the asset class ahead of an eventual rally, with a turn in inflation among the likely catalysts for recovery, is through Unicorn UK Smaller Companies (3178506). This fund pursues a successful relative value approach to smaller company stock picking, resulting in a portfolio of quality, robustly financed firms with attractive growth prospects.

Rather than seeking out go-go growth stocks which are unprofitable with potential to blow up, the fund hunts for quality small cap companies that are profitable and cash generative yet mispriced, trading at an attractive valuation versus their long-term average or compared to peers, providing scope for significant re-ratings or even the outside chance of premium-priced takeover bids.

Co-managed by Simon Moon and Alex Game, who also invest their own money in the fund, Unicorn UK Smaller Companies aims to achieve long-term capital growth by investing primarily in companies within the Numis Smaller Companies plus AIM index. The fund has a 0.88% ongoing charge.

Over the last 10 years, the fund has generated 78.7% cumulative returns, ahead of the 63.6% from the IA UK Smaller Companies sector. It is ranked first quartile in the sector over one, three and five years and second quartile over 10 years.

Fairly concentrated with 47 holdings at last count, the portfolio includes industrials such as Stoke-on-Trent-based Goodwin (GDWN), the family-controlled mechanical and refractory engineering group. Goodwin’s activities include the manufacture of high-specification steel products used in frigates and submarines, which means the company is benefiting from a surge in defence spending.

Another top 10 name is structural steelwork company Severfield (SFR), whose CV features involvement in high-profile projects including Tottenham Hotspur Stadium and The Shard.

The fund offers exposure to Ashtead Technology (AT.:AIM), which hires out underwater equipment to the renewable and oil and gas industries, as well as Cohort (CHRT:AIM), a defence technology business enjoying a bumper order book and which has raised its dividend every year since joining the stock market in 2006.

Investment bank Peel Hunt (PEEL:AIM) also nestles in the portfolio, as does Tortilla Mexican Grill (MEX:AIM).

Investors need to understand there are headwinds for the small cap space so an element of patience is required. However, the recovery could be spectacular.

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