Small and mid caps have had an exceptional period of performance in the rising market of the past three years but as the market has stuttered they have fallen further than the large caps.
Scouller says that the potential for discounts to widen on investment trusts makes it especially important to sell trusts at this point.
“UK small and mid-cap companies have continued to outperform larger companies over the past 6 months,” he said.
“However, we are concerned that the sharp price falls in some small and mid 250 companies seen over the past 2 months indicates that we may have a period of profit-taking in the near term, with further price falls to come.”
Data from FE Analytics shows that the FTSE Small Cap index is up 48.26 per cent over three years with the FTSE 250 up 47.25 per cent, The FTSE 100 has made just 24.46 per cent.
Performance of indices over 3yrs
Source: FE Analytics
However, since the market began to sell off on 28 February the indices have fallen substantially further than the FTSE 100 – 3.42 per cent and 3.87 per cent respectively.
The average smaller cap trust has fallen even more at 4.15 per cent thanks to widening discounts, and Scouller warns this dynamic could have more to run.
Performance of indices since 28 Feb
Source: FE Analytics
The average discount on the sector has closed from 14 per cent to 9 per cent over six months and investors should take profits while they can, he says.
“Following the strong NAV performance and discount narrowing there are significant profits to take and some narrow discounts to take advantage of,” he said.
“Trusts which are on notably narrow discounts include JP Morgan Mid Cap on a 4 per cent discount, compared with a one year range of 14 per cent to 3 per cent.”
“Similarly, Schroder UK Mid Cap is currently trading at NAV, compared with a one year range of a 14 per cent discount to a 1 per cent premium.”
Scouller also highlights Aberforth Smaller Companies as one that has benefitted from a narrowing discount only to fall sharply when the market turned.
The trust has seen NAV gains of 37.6 per cent over a year but shareholder returns have been even higher at 49.4 per cent thanks to a narrowing discount.
Performance of fund versus sector and index over 1yr
Source: FE Analytics
However, the portfolio has seen its discount dart back out since the end of February, leaving investors nursing short term losses.
Data from FE Analytics shows that FE Alpha manager Harry Nimmo’s Standard Life UK Smaller Companies Trust has been the worst-hit during the sell-off, losing 9.02 per cent.
Henderson Smaller Companies has lost 7.62 per cent and Dunedin Smaller Companies 6.55 per cent. JP Morgan Smaller Companies is down 6.36 per cent.
Source: FE Analytics
Data from FE Analytics shows that Henderson Smaller is top quartile over three, five and 10 year periods and has produced the best share price gains over the past three years of 95.59 per cent.
Scouller also rates BlackRock Throgmorton Trust, which is also on a 12 per cent discount.
The trust has the ability to add-value by taking short positions through the use of CFDs. Ralph Cox manages that side of the portfolio and Mike Prentis the long equity side.
The fund is less volatile than the Henderson portfolio, although it has not matched its returns.
Performance of funds versus sector and index over 3yrs
Source: FE Analytics
Scouller also rates Aberforth Smaller Companies for exposure to the value style.
For mid-caps he recommends Mercantile, which is sitting on a 1 0 per cent discount and has with an around 70 per cent of the portfolio in the FTSE 250.