The rare smaller companies funds that come with little stress

Investing in smaller companies is typically associated with higher volatility and sharper drawdowns than large-cap equities but some funds can still provide downside protection and maintain a good risk-reward balance, according to Trustnet analysis.

For the last instalment of this series, we identified funds with top-decile downside capture ratios and top-decile Sortino ratios with above-average sector returns across European, UK and US smaller companies peer groups. For all three, we used the sector average as the benchmark.

Of the three, Europe has the most, with two funds in the IA European Smaller Companies sector both meeting criteria, while the IA UK Smaller Companies sector produced one qualifying fund.

The IA North American Smaller Companies sector, by contrast, failed to produce a single fund meeting both thresholds, despite being the largest of the three by assets. Two strategies came close, but each excelled on only one measure.

Europe: Two funds meet the mark

The active Mirabaud Discovery Europe Ex-UK and the passive State Street SPDR MSCI Europe Small Cap Value Weighted UCITS ETF (exchange-traded fund) both achieved top-decile rankings on downside capture and Sortino ratio relative to the sector average.

The former fund has been a first-quartile performer in three of the past five years, ranking first in both 2025 and 2024. Its weaker periods came in 2023, when it slipped to the fourth quartile, and 2022, when it ranked in the third.

It is a five-FE fundinfo Crown-rated fund (the maximum score) managed by FE fundinfo Alpha Manager Hywel Franklin, which just had a fantastic 2025 and is ahead of a number industry heavyweights over 10 years.

The State Street ETF delivered slightly better downside protection at 82.35%, with a Sortino ratio of 0.49. The passive ETF has been a first-quartile performer in four of the past five years, with its only slip up coming in 2024 when it ranked in the third quartile.

Its value weighting explains its defensive profile – by tilting towards cheaper stocks with more stable characteristics, it has avoided the growth-oriented small-caps that suffered most during 2022's interest rate shock and provided more modest participation in subsequent rallies.

UK: One fund qualifies

Artemis UK Smaller Companies was the only fund in the IA UK Smaller Companies sector to meet both criteria, with a downside capture of 82.09% and Sortino ratio of 0.38.

Managed by Mark Niznik and Will Tamworth, the fund has been a remarkable performer, ranking in the first quartile of the IA UK Smaller Companies sector in three of the past five years including 2023, 2022 and 2021. It delivered second-quartile returns in both 2025 and 2024.

The managers focus on undervalued opportunities capable of delivering predictable, growing cashflows with minimal additional investment. This approach avoids speculative growth stocks and targets companies where growth is visible and can be self-financed, effectively de-risking the strategy.

The fund's lower Sortino ratio compared to the European strategies reflects the higher inherent volatility of UK small-caps but its downside capture demonstrates effective risk management relative to peers.

North America: No perfect solutions

The IA North American Smaller Companies sector failed to produce a single fund combining top-decile downside capture with top-decile Sortino ratio, as well as above-average performance.

CT US Smaller Companies came closest from a risk-adjusted returns perspective, achieving a top-decile Sortino ratio of 0.51 but with a downside capture of 91.47% that placed it in the eighth decile. The £85.5m fund carries a maximum five-Crown FE fundinfo rating and has been a first-quartile performer in four of the past five years.

Its downside capture offers some cushioning relative to the peer group but far less than the European and UK funds that made the cut. However, its strong Sortino ratio demonstrates it has converted the risks it took into returns more effectively than peers.

Finally, abrdn North American Small & Mid-Cap Equity took the opposite approach: top-decile downside capture of 81.79% but a fifth-decile Sortino ratio of just 0.17.

The fund has typically fallen about 82% as much as the sector average during down periods, comparable to the European defensive strategies but has struggled to generate strong risk-adjusted returns from the risks it has taken.

It ranked first quartile in 2024 and has delivered second-quartile performance in three of the past five years, but its low Sortino score suggests it has experienced significant downside volatility relative to its returns.

This article is the final instalment in a series. The sectors previously covered are: global, UK, North America, emerging markets and Flexible Investment.