If you had invested £1 in the UK’s smallest companies in 1955, for example, your money would have grown to an astounding £15,213 by January 2019, compared to the £991 generated through the FTSE All-Share Index (Numis, 2019).

Wow! What gives?

There are a number of factors that explain this outperformance.

First, what tiddlers lack in scale they make up for in nimbleness. It’s much easier for a minnow to adopt a new strategy that could dramatically improve revenue and profits than it is for a lumbering FTSE 100 giant.

Second, smaller firms operating in markets ripe for disruption can quickly steal market share from those who have been established for a while and may take their customers for granted. 

Last, small companies are often at the cutting edge, allowing them to offer new products to consumers/clients before the heavyweights get involved. 

Taken collectively, these reasons are why I think patient, young investors should contemplate getting some exposure.  

Where do I sign?

Hang on! Clearly, this kind of return doesn’t come without a few caveats.

First, past performance is no guide to the future. Investment professionals are obligated to highlight this to clients because, well, it’s 100% fact. History can provide some guidance but, ultimately, no one knows what returns will be like in the years ahead. 

Second, few of us will be able to stay in the market for over six decades. Many self-proclaimed ‘long-term investors’ have trouble holding the same stocks for more than a few months before selling and moving on! 

Third, small- and micro-cap investing is high risk and only appropriate for those who can stomach the inevitable ups and downs. Vastly more businesses fail than succeed, hence the need to know what you’re doing. 

Given the above (and lack of relevant passive trackers to invest in), I think the best solution is to let a professional money manager sort the wheat from the chaff and, for once, earn their (high) fees.

Some examples

One of two funds that feature in my own portfolio is the Marlborough UK Micro-Cap Growth fund, managed by veterans Giles Hargreave and Guy Feld. Almost half of the fund is made up of stocks with valuations of less than £250m. 

Performance over the long term (which is what we should really be interested in when judging manager skill) has been excellent. From the end of January 2010 to January 2020, for example, the fund returned 370%. The sector average was 246% and the FTSE All-Share returned 60%. 

Another fund I own is Lionstrust UK Micro-Cap, managed by Anthony Cross, Julian Fosh, Victoria Stevens, and Matt Tonge. At less than four years old, it’s too early to comment on performance over the long term. However, I’m cautiously optimistic given the stonking total return of 1,432% achieved since inception to December 2019 by Liontrust’s UK Smaller Companies fund (compared to the sector average of ‘just’ 705%).–

In 2019, the UK Micro-Cap fund achieved a total return of 29.1% compared to the sector average of 25.3%. Even more impressive, in my view, is the fact that the same fund achieved a gain of 3% compared to an average loss of 11.7% in 2018. This highlights how hiring good stockpickers can pay off in both good and not-so-good years.

The post Small stocks can make big money. Here’s the proof! appeared first on The Motley Fool UK.

More reading

• £10,000 put in a Cash ISA a decade ago is now worth…
• Are Diageo shares about to pull a Rolls-Royce?
• 1 big question to ask when thinking about what Nvidia stock could be worth
• How has the Scottish Mortgage Investment Trust share price risen 57% in a year?
• I just bought this magnificent £2 UK growth stock for my Stocks and Shares ISA

Paul Summers owns shares in Marlborough UK Micro-Cap Growth and Liontrust UK Micro-Cap. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Today, I’m looking at three top UK funds that have a growth focus.

Slater Growth Fund

The Slater Growth Fund is very well regarded among UK growth investors. Run by Mark Slater, who has an excellent reputation, the fund aims to achieve capital growth by investing mainly in UK stocks, although it can invest internationally. Slater looks for companies that are undervalued and have the potential for a share price re-rating.

The fund currently holds around 50 stocks across a range of market capitalisations. For example, in the top 10 holdings, there are several FTSE 100 companies, including Prudential and ITV, but also plenty of exciting smaller companies such as First Derivatives and Restore.

The performance of the fund has been fantastic, returning 11%, 40% and 115% over one, three and five years respectively. Fees are reasonable with the ongoing charge at 0.79% per year through Hargreaves Lansdown.

Lindsell Train Global Equity

Like Mark Slater, portfolio manager Nick Train also has a fantastic stock-picking track record. In fact, he’s often referred to as ‘Britain’s Warren Buffett.’ If you’re looking for exposure to global growth stocks, check out the Lindsell Train Global Equity fund.

This fund is a concentrated portfolio of around 30 holdings that are held for the long term. Train looks for conservatively financed companies that can produce high returns on capital and higher than average operating margins. The fund can invest in companies of all sizes, including small-caps. A glance at the top 10 holdings reveals familiar FTSE 100 names such as Unilever, Diageo and London Stock Exchange Group, as well as companies listed in Japan, Europe and the US.

The performance of this fund has been outstanding, returning 19%, 61% and 122% over one, three and five years respectively. Fees are low on Hargreaves Lansdown, with the ongoing charge just 0.54% per year.

Marlborough UK Micro-Cap Growth

Marlborough is a boutique fund manager that has a range of top performing funds. Its UK Micro-Cap Growth fund, run by Giles Hargreave, focuses on investing in smaller growth companies with a market capitalisation under £250m. The aim of the fund is to provide a total return of capital and income in excess of that achieved by the FTSE Small Cap index (excluding investment companies) over the medium-to-long term.

This fund is spread out over nearly 300 companies in order to lower stock-specific risk. Top holdings at present include Learning Technologies Group, Imimobile and Quixant. Performance has been excellent in recent years, with investors enjoying returns of 19%, 78% and 135% over one, three and five years respectively. Ongoing charges of 0.74% per year through Hargreaves Lansdown look reasonable. For those comfortable with the volatility associated with small-caps, this fund could be a good choice.

The post 3 top growth funds to buy in 2018 appeared first on The Motley Fool UK.

More reading

• £10,000 put in a Cash ISA a decade ago is now worth…
• Are Diageo shares about to pull a Rolls-Royce?
• 1 big question to ask when thinking about what Nvidia stock could be worth
• How has the Scottish Mortgage Investment Trust share price risen 57% in a year?
• I just bought this magnificent £2 UK growth stock for my Stocks and Shares ISA

Edward Sheldon owns shares in Unilever, Diageo, ITV and First Derivatives. The Motley Fool UK owns shares of and has recommended Unilever. The Motley Fool UK has recommended Diageo and ITV. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.