Why Small Investment Trusts Often Outperform

Have you ever wondered why the biggest names in investing—those massive funds chasing megacap giants—don’t always deliver the juiciest returns? I’ve noticed something intriguing over the years: sometimes the real gems hide in the smaller corners of the market. Specifically, certain compact investment trusts seem to quietly outperform their larger peers, especially when it comes to tapping into high-potential but under-the-radar companies. It’s counterintuitive in a world obsessed with scale, but small can indeed be powerful.

In an era dominated by index trackers piling into the same handful of huge stocks, many investors overlook vehicles that specialize in lesser-known opportunities. These smaller investment trusts often fly under the institutional radar, yet they possess structural edges that allow them to chase growth where others can’t tread. Let’s dive into why these modest-sized options deserve a closer look.

The Hidden Appeal of Smaller Investment Trusts

Investment trusts, being closed-ended, offer a unique setup compared to open-ended funds. Managers aren’t forced to sell holdings just because investors want their money back. This freedom becomes especially valuable when dealing with smaller, less liquid companies—think micro-caps or even private-ish opportunities that promise outsized long-term rewards but come with trading challenges.

Larger trusts face their own hurdles here. If a big fund tries to build a meaningful position in a tiny company, it risks becoming the dominant shareholder almost overnight, which can distort pricing or limit flexibility. Smaller trusts sidestep this issue entirely. They stay agile, taking stakes that actually move the needle on performance without overwhelming the underlying business.

Perhaps the most compelling aspect is the illiquidity premium. Investors demand extra return for holding assets that aren’t easy to trade quickly. Smaller trusts are built to capture this premium by design, holding positions longer and reaping rewards when the market eventually recognizes the value.

Small can be beautiful in the investment trust industry. There are some smaller and relatively low-profile trusts that could make excellent additions to investors’ portfolios, but they don’t always get the interest they deserve.

– Communications director at an industry body

That sentiment rings true. While headlines celebrate massive trusts, the quiet outperformers often lurk among those with modest asset bases. In fact, recent years have shown that some of the strongest performers maintained assets well below £200 million.

Structural Advantages That Drive Performance

Let’s break down the mechanics. Closed-end structure means no daily inflows or outflows forcing hasty trades. Managers can commit to long-term theses in illiquid names, riding out volatility that would sink open-ended counterparts. This patience often translates to superior compounding.

Smaller size enhances nimbleness. A trust managing £100 million can allocate meaningfully to a £50 million company without issues. Scale that up to billions, and the same position becomes trivial—or impossible without market impact. I’ve seen how this dynamic lets smaller trusts punch above their weight in volatile or niche sectors.

• Freedom from redemption pressure allows deeper conviction bets.
• Meaningful positions in micro-caps create real performance impact.
• Ability to harvest the illiquidity premium over extended horizons.
• Mechanisms like share redemptions keep size optimal for opportunity capture.

Some trusts even embed features to cap growth deliberately. They redeem shares when assets swell too much, preserving the very advantages that fuel outperformance. It’s a self-regulating system that prioritizes quality over quantity.

In my view, this setup suits patient investors perfectly. You sacrifice some immediate liquidity for potentially higher long-term rewards. But when markets reward risk-taking in overlooked areas, the payoff can be substantial.

Standout Performers From Recent Years

Looking back at 2025, the numbers tell a compelling story. Several trusts with assets under £200 million posted eye-catching returns, far outpacing broader markets. Precious metals and natural resources themes dominated, reflecting global demand shifts in energy transitions and tech advancements.

These figures highlight how focused, smaller vehicles capitalized on sector tailwinds. The natural resources play, for instance, benefited from insatiable demand for critical minerals amid geopolitical changes and green energy pushes. It’s not just luck—it’s structural fit meeting opportunity.

Experts have noted that such performance might signal deeper trends rather than fleeting spikes. Long-term drivers like technological progress and resource scarcity could sustain momentum. Of course, past results don’t guarantee future gains, but the pattern is hard to ignore.

Real-World Examples of Smart Design

Consider trusts that actively manage their size. One UK micro-cap specialist uses a redemption mechanism to hover around £100 million in assets. The goal? Maximize exposure to illiquid opportunities while ensuring each holding meaningfully influences returns.

Another activist-oriented trust capped itself at £150 million recently, trimming holdings for greater influence per position. These deliberate choices reflect a philosophy: stay small enough to exploit inefficiencies that bigger players miss.

I’ve always appreciated this approach. It reminds me that investing isn’t about being the biggest—it’s about being effective. When a trust can own a slice large enough to engage management or benefit from takeovers, shareholder value often follows.

Risks and Considerations to Keep in Mind

No investment is perfect. Smaller trusts can trade at wider discounts to net asset value, introducing volatility. Liquidity in the trust shares themselves might be lower, making entry and exit trickier during stress.

Sector concentration poses another risk. Many top performers tied to commodities or niche areas—great when winds blow right, painful when they shift. Diversification across a portfolio remains essential.

1. Assess the manager’s track record in illiquid spaces.
2. Monitor discount levels and control mechanisms.
3. Balance with broader holdings for risk mitigation.
4. Focus on long-term horizons—short-term swings can mislead.
5. Stay informed on underlying sector dynamics.

These steps help navigate the trade-offs. The key is patience. Smaller trusts reward those willing to look beyond the headlines and hold through cycles.

Why This Matters in Today’s Market

With mega-caps dominating indices, diversification feels more important than ever. Smaller trusts provide exposure to areas ignored by passive flows—true active management at its best. They capture growth in emerging themes, from resource scarcity to innovative small businesses.

Looking ahead to 2026 and beyond, structural tailwinds persist. Energy transitions, tech advancements, and geopolitical realignments favor nimble allocators. Smaller trusts, unburdened by size constraints, stand ready to benefit.

In my experience, the most rewarding discoveries come from places others overlook. These compact vehicles might just be one such hidden edge. If you’re seeking growth beyond the obvious, giving them serious consideration could pay off handsomely.

Of course, always do your due diligence. Markets evolve, and what worked yesterday might shift tomorrow. But the fundamental logic—small size enabling big opportunities—remains as relevant as ever.

Investing involves risks, including potential loss of capital. This discussion aims to inform, not advise. Consider your circumstances and seek professional guidance when needed.