Out of favour, not out of potential: the case for UK smaller companies

By Juliet Schooling Latter on 22 June 2026 in UK

Is now the time to consider UK smaller companies? The share prices of these stocks have been slow to recover from this year’s geopolitical problems and rising energy prices. But that presents an opportunity. Investors embracing these businesses when valuations are low may benefit when they’re back in favour with the stock market.

First, let’s consider how smaller companies have performed in 2026. The combination of war, inflation and economic concerns led to stock markets plunging in March. While the blue-chip FTSE 100 bounced back relatively quickly to near all-time highs, indices featuring small and mid-cap names have found it more of a struggle. Factors included: investors overlooking this part of the market, ongoing uncertainty about the UK economy, and investors favouring larger, more liquid companies.

Against this backdrop, we highlight where the managers of three UK smaller companies funds are finding opportunities and where the challenges remain.

Unicorn UK Smaller Companies

This is a small, flexible, high-conviction fund with around 40 positions. Its focus is on making long-term investments in companies with strong fundamentals. We believe the concentrated nature of the portfolio, which is co-managed by Simon Moon and Fraser Mackersie, will help it continue to do well.

• Recent positives: British technology firm Raspberry Pi Holdings has seen its stock price rise around 180% in 2026, due to stronger-than-expected full-year results and strong demand for chips. Gooch & Housego, a manufacturer of optical components, meanwhile, is up 70% after a strong trading update revealed increased demand from defence customers*.
• Stock disappointments: Engineering firm Goodwin, the fund’s largest individual position, has been one of its largest detractors. After it admitted losing two tenders, the share price tumbled 47%. Alfa Financial Software and Craneware were both affected by the sharp AI-driven sell-off in SaaS and technology stocks during February**.
• Current positioning: Engineering is the fund’s largest sector position with a 21% share, followed by software & computer services, financial services and technology**. The fund has a diversified portfolio of high-quality smaller companies with strong balance sheets, resilient cash generation, defensible market positions and well-aligned management.
• Outlook: The managers acknowledged the near-term backdrop was unsettled but emphasised how its positioning had served investors well. “We continue to favour businesses able to self-fund growth, take market share and compound shareholder value through differing economic environments,” they wrote.

Liontrust UK Micro Cap

This fund, which is managed by a five-strong team, aims to deliver long-term capital growth by investing in companies with a competitive advantage. These qualities can include an excellent distribution network, high recurring revenues or a strong brand. Ideally, they will have more than one such characteristic.

• Recent positives: Calnex Solutions, the maker of specialist testing equipment and the fund’s second-largest holding, has seen its stock price increase on the back of improving momentum and diversification. Shares in CML Microsystems, a semiconductor chip producer, also rose substantially on April’s trading update and wider investor confidence***.
• Stock disappointments: Microlise, a tech firm providing software for delivery companies, suffered after full-year results highlighted weaker profitability and a more cautious outlook. Nexteq, a technology provider to the gaming industry, was another detractor. This came after the company warned that full-year 2026 revenue would be below market expectations***.
• Current positioning: The fund has more than 27% of its assets in technology companies, 23% in the industrials sector, and 12% in healthcare. As far as individual companies are concerned, its 10 largest holdings each account for between 3% and 3.7% of assets under management**.
• Outlook: In a recent update, the managers suggested that merger and acquisition activity was likely to remain a factor, given the attraction of well-capitalised, cash-generative growth businesses. They wrote: “We believe the combination of continued growth in profits and cash flows, together with generationally low valuations, provides a compelling opportunity for the fund.”

IFSL Marlborough UK Micro-Cap Growth

This is one of the largest and most successful smaller companies’ funds. It’s co-managed by the experienced duo of Guy Feld and Eustace Santa Barbara. The team has demonstrated its ability to add value through stock selection, driven by company meetings and diligent research.

• Recent positives: Treatt, a flavourings and ingredients company, has performed well after receiving a bid from its largest shareholder. Filtronic, a radio frequency technology specialist and the fund’s largest position, also saw its stock price rise after a new contract with an existing customer***.
• Stock disappointments: Shares in LBG Media, whose brands include LADbible, fell on a profit warning, while a weaker coal price adversely affected Thungela Resources. In a recent update, the fund’s managers also highlighted price falls for Jubilee Metals, Pulsar, Afentra, and AB Dynamics***.
• Current positioning: Industrials account for the largest sector exposure of almost 22%, followed by financials, technology, consumer discretionary, and basic materials. While the UK has a country weighting of almost 84%, the fund’s other exposures include Canada, the United States, Australia, Singapore and Austria**.
• Outlook: The managers noted that the UK economy had been facing a more difficult backdrop of weak growth, renewed inflation risks and heightened geopolitical uncertainty. “We will continue to invest in businesses that we believe can perform irrespective of the geopolitical environment,” they wrote.

The case for patience

It’s no secret smaller companies remain out of favour. Economic uncertainty, inflation pressures and geopolitical tensions continue to weigh on sentiment in the short term. But history shows that periods of weak performance have often created attractive entry points for long-term investors.

As Georgina Brittain, co-manager of the JPMorgan UK Small Cap Growth & Income Trust, said: “Rising M&A activity and robust share buybacks suggest current valuations understate the market’s underlying potential. Looking ahead, the road is unlikely to be smooth. But for investors focused on companies with strong operating momentum and disciplined capital allocation, we believe the conditions are in place to navigate this cycle and generate durable returns.”

The broader takeaway is straightforward. The next decade for UK equities does not need to be exceptional in order to deliver solid returns. After a prolonged period of pessimism, valuations already appear to discount a significant amount of bad news. From here, even modest improvements, whether in capital flows, investor confidence, or domestic demand, could be enough to trigger a meaningful re-rating in UK smaller companies.

*Source: quarterly commentary, Q1 2026
**Source: fund factsheet, 30 April 2026
***Source: fund commentary, May 2026