3 small-cap funds for your ISA

Empirical evidence suggests that small-cap stocks tend to outperform the large caps over the long-term, especially following periods of underperformance such as we have seen in the last few years. There is now a sizeable valuation gap between these different asset classes, so it is possible that smaller companies might deliver some attractive returns.¹ 
 
Definitions vary, but a small-cap stock is generally considered to be a company whose total market capitalisation or value is anywhere between $250million and $2 billion. By comparison, some of the large tech stocks like Microsoft are valued in the low trillions. 
 
Over the last five years the MSCI World Small Cap index delivered an annualised return of 9.6% and is now trading on a forward price earnings (PE) ratio of 16.3. This was well behind the 15.2% produced by its large-cap equivalent that is more expensive with a forward PE of 19.8. Please note past performance is not a reliable indicator of future returns.²

Investors with a 10-year horizon who are comfortable with the higher volatility could take advantage of this potential by using one of the small-cap options from Fidelity’s Select 50 list of handpicked funds. There are three such funds to choose from, with each providing a different type of exposure, as outlined below.

Vanguard Global Small Cap Index Fund

First up is the Vanguard Global Small Cap Index Fund, which is unusual as it is a passively managed vehicle in an area that is more normally associated with an active approach. The fund aims to generate long-term capital growth by replicating the performance of the MSCI World Small Cap Index, which contains around 4,000 companies from different developed markets.

This type of global diversification offers an easy and low-cost way to gain exposure to small-cap stocks via a single product, especially as Vanguard is a well-respected provider of these sorts of tracker funds and has built up a 15-year record on this particular mandate.

Over the last five years the GBP accumulation share class generated an annualised return of 10.1%,³ although the 12-month figures have often been double digit gains or losses. As you would expect from a tracker fund, the ongoing charges are a low 0.3%.

• More on Vanguard Global Small Cap Index Fund

Brown Advisory US Smaller Companies Fund

If you would prefer a purely regional exposure there is the Brown Advisory US Smaller Companies Fund, which is one of Tom Stevenson’s fund picks for 2025. The management group that runs it is based in America and has an extensive team that is responsible for researching and investing in this specialist area.

Brown Advisory are disciplined stock pickers that have put together a concentrated portfolio of high-quality businesses with sound management teams and competitive advantages. These types of attributes often enable a company to compound its earnings at an attractive rate for an extended period of time.

Over the last five years the shares have generated an annualised return of 7.6% and they have shown themselves to be capable of producing periods of strong performance.⁴ The ongoing charges figure is 0.84%, which seems reasonable for an actively managed overseas smaller companies fund.

• More on Brown Advisory US Smaller Companies Fund

Fidelity Funds - Asian Smaller Companies Fund

Another regional option is the Fidelity Funds - Asian Smaller Companies Fund, which invests in countries like China, India and South Korea. This part of the world is an important driver of global growth, with the experienced management team of Nitin Bajaj and Ajinkya Dhavale looking for future winners from across the area.

It is a resource-intensive process, but they are backed up by an extensive, high-quality pool of equity analysts who can help to uncover the sort of businesses that they are looking for. These have the potential to deliver strong returns, but investors need to be comfortable with the higher volatility and be willing to take a long-term view.

The fund has generated an impressive 5-year annualised return of 11.3%, although the performance has been more muted since 2021.⁵ Its latest ongoing charges figure is 1.08%, which reflects the extra costs associated with the region.

• More on Fidelity Funds - Asian Smaller Companies Fund

Past performance is not a reliable indicator of future returns

Source: Morningstar, total returns from 31.12.19 to 31.12.24. Excludes initial charge.

Source:

¹ Global Alpha Capital Management, November 2024
² MSCI, data to 28/2/25
^3,4,5 Fidelity International, as at 31 December 2024

Important information - The value of investments and the income from them can go down as well as up so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Eligibility to invest in an ISA and tax treatment depends on personal circumstances and all tax rules may change in the future. The three funds mentioned invest in overseas markets so the value of investments could be affected by changes in currency exchange rates. The funds invest more heavily than others in smaller companies, which can carry a higher risk because their share prices may be more volatile than those of larger companies. The Fidelity Funds - Asian Smaller Companies Fund invests in emerging markets which can be more volatile than other more developed markets. There is no guarantee that the investment objective of any Index Tracking Sub-Fund will be achieved. The performance of the sub-fund may not match the performance of the index it tracks due to factors including, but not limited to, the investment strategy used, fees and expenses and taxes. The Key Investor Information Document (KIID) / Key Information Document (KID) is available in English and can be obtained from our website at www.fidelity.co.uk. Please note that Tom’s picks and Select 50 are not a personal recommendation for you. If you are unsure about the suitability of an investment you should speak to one of  Fidelity’s advisers or an authorised financial adviser of your choice.