Investing in small-cap stocks can generate huge returns, but it also comes with extra risk. Small businesses are much more likely to run into problems than their larger peers, which means that you really need to know the ins and outs of every business before you get involved.
This is why small-cap focused investment trusts are a great tool for investors who want to benefit from small-cap growth but don’t have the time or experience to do the work themselves.
Returns of 1,000%
Standard Life UK Smaller Companies (LSE: SLS) has chalked up one of the best records around when it comes to small-cap investing. Over the past five years, the trust has produced a total return of 115% for investors, compared to its benchmark (UK Smaller Companies) return of 107% over the same period.
The trust’s manager, Harry Nimmo is somewhat of a legend in investment circles having managed the Smaller Companies Fund since 2003, achieving a total return for investors of nearly 1,000% since the beginning, which makes him even more successful than City grandee Neil Woodford.
Nimmo likes growth companies, so you won’t find any value investments in his portfolio. He likes to own shares that have performed well and continue to produce returns such as First Derivatives and NMC Health, two of the fund’s top 10 holdings.
The one drawback of the Standard Life UK Smaller Companies is that it is relatively expensive with a total ongoing cost to investors of 1.1% per annum, and its dividend yield leaves much to be desired, currently standing at 1.3%. Nonetheless, after considering the company’s historic performance in the small-cap sector, I believe that this is a price worth paying to invest alongside Nimmo.
Value focus
Another small-cap focused trust that’s smashed its benchmark return over the past five years is the Invesco Perpetual UK Smaller Companies (LSE: IPU). Jonathan Brown manages the portfolio here, and once again he’s been at the helm for well over a decade since starting in June 2002. Over the past five years, the firm has returned 139% for investors, compared to the benchmark return of 107%.
And as well as this stronger performance, the trust is also attractive to income investors as it currently supports a dividend yield of 3.4% and its portfolio is more value-focused with Coats and Johnson Service featuring in the top five holdings. With a total ongoing cost of 0.8% per annum, the Invesco offering is also cheaper than Standard Life’s.
That being said, while Invesco might look like the better offering based on short-term performance, over the long-term its performance is less appealing. Over the past decade, the trust has produced a total return for investors of 231%. Meanwhile, Nimmo and team have returned 327% over the same period, excluding dividends.
However, past performance is no guarantee of future returns and either trust would make a great addition to any portfolio. A combination of the two would provide an instantly diversified portfolio of the market’s top small-caps.
