Small Cap Funds: How Small is Small?

In a previous blog post I outlined a search for a global small cap fund.

My chosen vehicle, Marlborough Global Small Cap, is not available on my SIPP platform, AJ Bell, so in beginning to consider where to invest my 2025/26 tax year's SIPP allocation, I've once again been scouring for small cap investment ideas, mainly, but not exclusively, small cap funds.

As the above graphic from the 2024 Deutsche Numis Indices Annual Review illustrates, seasoned investors in UK small caps keep the faith for two main reasons:

1. Over the long-term, small caps have outperformed.

2. Within small caps, the smallest companies outperformed the most.

To be more specific, using the Deutsche Numis data, from 1955-2023 in the UK: the annualised returns from an investment in the Deutsche Numis Small Cap Index (DNSCI), the Mid Cap, and Large Cap indices (all ex-Investment companies) were 14.1%, 12.8% and 11.0%, respectively.

For the very smallest companies, the return on the Deutsche Numis Small Cap 1000 Index of the DNSC 1000 (XIC) the return was even higher at 15.7% p.a.

In monetary terms, this means, including re-investment of dividends, £1 invested in 1955 in the smallest companies would have been worth £22,572 by the end of 2023. This compares to £9,171 for the DNSCI, £4,159 for the Mid Cap and £1,357 for the Large Cap.

However, seasoned investors in UK small caps have had to stretch that definition of 'the long-term' to retain that faith in small cap outperformance. 2024 marked the third year in a row when the Deutsche Numis Small Cap Index under-performed its long-term average, returning 9.5%.

That said, some individual funds have bucked that trend, despite the pall of gloom overhanging the UK economy and stock market.

Interestingly, taking the calendar year 2024, three of the best performing UK small cap investment vehicles specialise in the smallest companies:

Rockwood Strategic had an NAV return of 25.4%.

The Onward Opportunities Trust returned 23.4%.

River UK Micro Cap's NAV grew by 19.9%.

I already invest in first two, and may consider the River UK Micro Cap trust, not least as activist investor Saba Capital has been building a stake, up to 14.1% as of January 9th 2025, possibly a prelude to the next wave of requisitions and potential corporate action.

Comparing smallness across different geographies

To revert to the title of this post, how small is small in different contexts?

I've recently discovered it's possible to rank open-ended funds on Morningstar by average market cap of portfolio holdings.

For UK smaller companies, the open-ended counterpart to Onward Opportunities, SVS Dowgate Wealth UK Small Cap Growth, has the second smallest average market cap of £69m. For comparison, the River UK trust's average is £102m.

These numbers are far smaller average company sizes than other geographies.

Europe: The frustratingly platform unavailable Schroder Nordic Micro Cap fund has an average market cap of £223m.

Japan: Daiwa Japan Equity Small Cap Absolute Value £151.25m.

Asia Ex-Japan: Matthews Asia Discovery £1.865 bn.

USA: FTGF Royce US Small Cap Opportunity £1.062bn.

Interestingly, despite its micro cap label, the again frustratingly unavailable Heptagon Driehaus US Micro Cap fund has an average market cap of £2.01bn, almost double that of the Royce fund.

Lesson learnt: Don't assume a fund calling itself micro cap fund is investing in the very smallest companies.

Still no global micro cap fund

Once again, I'm left lamenting the absence of a genuinely global micro cap investment vehicle. Perhaps an investment firm could do for the micro cap space what Alliance Witan has done for the larger cap universe and bring together a series of micro cap investors specialising in different territories into a single 'best ideas' global micro cap investment vehicle?