Key Takeaways
- UK small caps offer diversification and growth opportunities
- M&A activity has increased
- Number of category funds lowest since 1997
- Surviving funds offer potential alpha
UK small caps are among the most undervalued segments of the UK equity market. Our analysts estimate these stocks trade at a significant discount to their fair value, well below historic averages. This presents a potentially attractive entry point. Globally, small caps also appear attractively valued, especially compared with US large caps, particularly in the growth sector. Here we look at the seven active investment strategies in the EAA UK small-cap equity Morningstar Category and highlight four of the best-rated funds in this category.
The Case for UK Small-Cap Stocks
Easing monetary conditions could boost small caps, which historically outperform larger caps after rate cuts. Additionally, a rebalancing of equity allocation could benefit both large and small UK companies. The Mansion House Accord will funnel £25 billion into UK assets, including AIM shares, by 2030, which could provide substantial policy support.
Smaller companies offer significant growth opportunities and over the long term tend to outperform their larger counterparts. Their ability to tap into emerging themes and harness entrepreneurial spirit makes them a fertile ground for active managers. The vast number of smaller companies creates a broad universe, often overlooked by analysts, resulting in a less efficient market. This inefficiency can allow active managers to add significant alpha over the long term.
Investing in smaller companies, particularly in the UK, provides diversification away from internationally focused large caps, offering more domestically driven revenue streams. Opportunities extend beyond defensive consumer names and big energy players, with greater representation in technology, consumer cyclicals, and industrials. Large caps in the UK tend to be value-oriented, while smaller companies offer growth exposure, diversifying return profiles.
Public-market investors have shied away from UK smaller companies, but the structural discounts on offer have not gone unnoticed. Corporate and private equity buyers are stepping in, and M&A activity has increased significantly over the past few years. New listings have been scarce.
As long as valuations remain at current levels, M&A activity will likely accelerate. Private equity firms have ample capital to deploy, and UK companies appear to be easy targets.
UK Small-Cap Universe Has Narrowed
With ongoing stress from outflows in the sector, the average fund size has shrunk significantly and placed commercial viability under pressure for running UK small-cap funds.
Since 2023, there has been an exodus from the category, with prominent asset managers such as Aviva, Baillie Gifford, and Ninety-One closing funds. In fact, the number of open-end funds in the category is now at its lowest since 1997.
UK small-cap managers typically invest further down the cap spectrum than their European and US peers. This approach offers diversification and potential alpha, as information tends to become less asymmetric lower down the cap scale.
As of April 2025, our Manager Research team covered seven active investment strategies in the EAA UK small-cap equity Morningstar Category. Our coverage spans various investment styles and shows significant variation in analyst conviction regarding the People and Process Pillars.
Top-Rated UK Small-Cap Funds
Artemis UK Smaller Companies
Mark Niznik has managed this fund since 2007, taking sole charge in 2011. He appointed Will Tamworth as an analyst in 2015, promoting him to comanager in 2016. Their strategy targets niche market leaders with strong balance sheets trading at reasonable valuations. Investing further down the cap spectrum, they leverage qualitative and fundamental analysis to uncover value opportunities. Despite 2020’s underperformance due to their valuation-conscious approach, they remain committed to their strategy, which has seen a strong recovery.
WS Amati UK Listed Smaller Companies
Dr. Paul Jourdan has led this strategy since 2000. He is one of the longest-tenured managers in the sector, supported by Scott McKenzie, a 30-year UK equity veteran. Their bottom-up, team-based approach seeks companies with structural growth drivers or competitive edges. Despite strong historical performance in down markets, recent years have been challenging. The 2022 drawdown, AIM allocation, and stock-selection issues have hurt performance. However, we remain confident in the team’s long-term alpha potential.
Abrdn UK Smaller Companies
Abrdn UK Smaller Companies fund remains a solid pick with a strong heritage. Abby Glennie succeeded veteran Harry Nimmo in 2022 and is supported by deputy Amanda Yeaman. They employ a proven UK small-cap strategy focusing on growth, quality, and earnings momentum. Despite recent market struggles and outflows, the portfolio offers attractive growth prospects, supported by a healthy dividend yield.
WS Gresham House UK Smaller Companies
Launched in 2019, this UK small-cap fund is helmed by experienced lead manager Ken Wotton and comanager Cassie Herlihy. They employ a private equity mentality to investing in UK small caps and mid-caps. A key part of the appeal rests in the rigorous approach to quality and valuation, sector specialism, and their good use of an extensive and established specialist network, which differentiates. The process has served investors well in recent years, and the fund has delivered attractive returns with lower realized volatility than some peers.
This article was taken from the UK Small-Cap Landscape report from May 2025 and was written by Henry Ince and Daniel Haydon.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
