Charles Cade, head of research at Numis Securities, says that smaller companies investment trusts have experienced strong share price performance which has tightened discounts and made value hard to find.
"No small cap trusts can really be classed as a value play as the sector is trading on a much tighter discount than it has done in the past," Cade said.
"There have been quite a lot of inflows into the sector as smaller companies have performed well, so I would say there is more downside risk now than earlier in the year."
However, he says that investors should not be put off buying closed-ended small cap funds outright.
The sector is filled with top-rated managers who have a history of delivering good returns to their investors, he says, and while they may not be as cheap as they have been in the past, there are still opportunities.
Here are the small caps trusts managed by FE Alpha Managers that are still trading on a discount.
Richard Plackett – The Throgmorton Trust – 8.01 per cent discount
FE Alpha Manager Richard Plackett is more widely known for running the £1.8bn BlackRock UK Special Situations fund, which has been a top-quartile performer in the IMA UK All Companies sector since he took over in June 2004.
He also co-manages the £216m Throgmorton Trust with Mike Prentis.
Throgmorton operates in a similar way to Prentis’s BlackRock UK Smaller Companies trust as it invests towards the lower end of the market cap spectrum, including AIM stocks.
While Prentis looks after the long-only positions, Plackett takes care of the short positions via CFDs (contracts for difference).
Cade rates the trust highly, saying BlackRock has one of the best UK smaller companies teams out there.
"They have a focus on quality growth which has paid off," Cade added.
The duo took over the closed-ended fund in July 2008. Since then it has returned 155.3 per cent, beating its benchmark – the Numis NSCI plus AIM ex IT index – by more than 80 percentage points.
Performance of trust vs index since July 2008
Source: FE Analytics
That period incorporates the collapse of Lehman Brothers in September 2008.
Over five years, the trust has returned a staggering 328.87 per cent and has still comfortably beaten its benchmark.
That performance has, in part, been down to a narrowing discount. Nevertheless, Throgmorton’s NAV has still returned 231.93 per cent over five years, which still beats the index.
The managers seem to be playing a recovery in the UK economy, with a high weighting to domestic stocks.
For instance, the housebuilder Bellway, kitchen manufacturer Howden Joinery and real estate company Workspace Group are their three largest holdings.
While the trust is trading on a fairly wide discount of 8.01 per cent, that is much tighter than its three-year average of 16.58 per cent and its one-year average of 15.39 per cent, according to the AIC.
Throgmorton is highly geared at 28 per cent, though that also includes the effects of Plackett’s CFDs. Ongoing charges are 1.15 per cent, though it does charge a performance fee.
Richard Smith – Invesco Perpetual UK Smaller Companies IT – 11 per cent discount
As well as managing the open-ended £482m Invesco Perpetual UK Smaller Companies Equity fund, FE Alpha Manager Richard Smith also runs a close-ended small cap fund.
The two portfolios are very similar, with Synergy Health, Dechra Pharmaceuticals, Howden Joinery, Senior and Diploma in both the fund and trust’s top-five holdings.
The major difference, however, is that investors can gain access to Smith’s strategy on an 11 per cent discount if they were to buy his trust.
The £162.3m trust has also beaten his OEIC over one, three, five and 10 years. The best of those relative performances has been over the last decade, where his closed-ended fund has outperformed by close to 80 percentage points.
Performance of trust vs fund and index over 10yrs
Source: FE Analytics
Invesco Perpetual UK Smaller Companies IT has also beaten its Numis NSCI ex IT index over that period.
However, like Plackett and Prentis’s portfolio, that outperformance is down to a narrowing discount: the trust's NAV returns are very similar to his OEIC’s over most time frames.
Its current discount is also tighter than its one- and three-year average.
The manager has the ability to use gearing, but has chosen not to do so at the current time. He said in a recent note to shareholders that he has become more cautious on his outlook for UK smaller companies, given the recent strong rise in share prices.
Smith has also reduced his weighting to some of the more cyclical names in his portfolio. He is instead buying companies that are either of high quality with specialist product offerings or that have management teams he believes can steer them through difficult economic times.
Charles Tan, investment companies analyst at Cantor, says that he prefers the Throgmorton trust over Smith’s portfolio and says the Invesco Perpetual UK Smaller Companies IT is deserving of its wider discount.
"Out of the two Richards, I would back Plackett," he said.
Tan also says that Smith's decision not to use gearing at a time when the global economy is recovering could come back to haunt him.
Ongoing charges are 0.87 per cent.