Why I’ve invested all my pension money in UK small caps

Investors don’t buy shares in UK smaller companies for their defensive qualities, so far as I’m aware. They’re higher-risk assets, surely? So when I say I have all my pension money in them – the fruit of over 30 years’ work – people think I’m nuts.

I’ve done this because I think I’m going to make lots of money. I’m not recommending this strategy to anyone else, but I am suggesting it’s time investors reconsidered this unloved area of the market.

The past decade has been traumatic for UK ‘small caps’, as they’re known. Britain has been on the naughty step. The UK has suffered from political instability with Brexit, then the Liz Truss/Kwasi Kwarteng mini-budget, which unsettled investors. As a result, UK small-cap funds saw £6bn of outflows in the decade to December 2024, according to the Investment Association.

The malaise goes back further. Over the past three decades or so, UK pension funds have walked out on their country, cutting their exposure to UK equities from 53% on 31 December 1997 to 4% at the end of 2022, according to data from New Financial. Smaller companies have taken a disproportional hit from that, we believe.

Company management teams prefer economic stability when making investment decisions, in our experience. My sense is that the current government may not be winning many plaudits but does offer some stability.

The opposite seems to be true in the US. Donald Trump’s second presidency has been much more unpredictable. The chief executives we meet whose companies operate in the US are deferring investment decisions because of tariff uncertainty.

Despite this, US shares are historically expensive, pricing companies on average at 22x what they’re expected to earn in the coming year (according to data from J.P. Morgan Asset Management and Factset as at 30 June 2025). Typically, you would expect this price-to-earnings (P/E) ratio to be nearer 17x (which is the 30-year average P/E ratio, according to J.P. Morgan Asset Management, IBES and FactSet).

I feel this could encourage some investors to shift attention from the US, which in recent years has been like a powerful magnet, drawing money from all quarters of the world. A few scraps from the giant US investor table heading this way could really boost UK small caps.

There are certainly bargains to be had here, in our view. The best evidence for that is how the companies themselves are using surplus capital to buy back their own shares. Many of the companies within our Artemis UK Smaller Companies fund, which aims to grow investors’ capital over a five-year period, are doing just that. In the first half of this year alone, 21 of our holdings bought back over 0.5% of their own shares in the market¹. I’ve not seen anything like it in more than 30 years of investing in this area.

In the past six-and-a-half years, the Artemis UK Smaller Companies Fund has seen 35 takeovers, with the acquirers making offers that were 48% higher, on average, than the companies’ share prices just before the bids². Most of these bids have been from corporate buyers who, presumably, feel that they are getting good value even at that price.

The end of low interest rates and low borrowing costs, ongoing tariff threats and the unwinding of globalisation that helped reduce costs all mean inflation is back on the agenda.

In these circumstances, it seems sensible to have some strong domestic companies in your portfolio that are relatively immune to Trump’s shenanigans. In the companies that Artemis’ small-cap funds have invested in, typically around two thirds of their business is domestic, which should help.

We would suggest three more ‘rules to live by’ when picking stocks in the current environment. First and foremost, favour companies with no debt. That way, if you make a mistake when buying their shares, it’s less likely to be a disaster.

Second, look for companies that are growing at a sustainable rate and are leaders in their niche categories – they tend to have pricing power if inflation gets out of hand again.

Last but by no means least, pick companies that are making money – not ones borrowing like crazy to develop their technology and build a customer base.

We get the impression that people think the UK small-cap market is full of risky, highly indebted companies hoping to make it big. It’s actually much more boring than that – which suits me and my pension perfectly!

Here are a few examples of stocks we hold in the Artemis UK Smaller Companies Fund and the Artemis UK Future Leaders plc investment trust (which aims to achieve long-term total returns for shareholders primarily by actively investing in a broad cross section of small to medium-sized UK quoted companies). These should not be taken as investment recommendations:

Mony Group owns the Moneysupermarket brands – the market leader in price-comparison websites. Its rewards programme, SuperSaveClub, goes further in helping to convert a one-off transaction into a recurring revenue stream and therefore reduce the business’s reliance on Google or television advertising, we believe. It trades on a P/E of 11x and the shares deliver a 9% free cash-flow yield³.

Mears Group is the market leader in social housing maintenance across the country. It maintains houses owned by local councils and housing associations under long-term contracts, where the money is ring-fenced to provide the service. It’s on a P/E of 9x, has a 11% free cash-flow yield and has 15% of its market value in cash⁴.

Moonpig dominates the UK’s online market for greetings cards, with a 70% share⁵ – multiple times that of its nearest rival. Moonpig’s data is immensely valuable. Knowing who a card is bought for and why it was sent helps convert a one-off purchase into a repeat purchase. Moonpig already has over 100 million customer reminders on its system. Its subscription business, Moonpig Plus, has increased both the frequency of purchases and the gift attach rate and is growing rapidly towards a million customers. Moonpig is on a P/E of 13x and a 9% free cash-flow yield⁶. 

Over the long term, UK smaller companies have returned 3.1% more than large caps per year, on average, according to Deutsche Numis indices’ data from 1955 to the end of 2024. By buying smartly, it’s not unreasonable to hope to add another 2% a year to that.

My co-manager Will Tamworth and I have heavily invested in the Artemis Future Leaders investment trust we’ve just taken on, which aims to achieve long-term total returns for shareholders primarily by actively investing in a broad cross-section of small to medium sized UK quoted companies. At the beginning of September 2025, it was on a 15% discount to its net asset value, which feels like an additional comfort blanket.

People think I’m taking a big risk by putting all my pension into my own funds. I don’t see it that way. I see a portfolio of quality shares that are growing steadily, have no debt on average and are trading on an attractive valuation. That works for me! 

Important information

This is a marketing communication. Before making any final investment decisions, and to understand the investment risks involved, refer to the Investor Disclosure Document, Articles of Association and KID, available in English, from the relevant fund page or literature section on www.artemisfunds.com. The documents can also be found on www.fundinfo.com.

CAPITAL AT RISK. All financial investments involve taking risk and the value of your investment may go down as well as up. This means your investment is not guaranteed and you may not get back as much as you put in. Any income from the investment is also likely to vary and cannot be guaranteed.

Investment in a trust concerns the acquisition of units/shares in the trust and not in the underlying assets of the trust.

Any research and analysis in this communication has been obtained by Artemis for its own use. Although this communication is based on sources of information that Artemis believes to be reliable, no guarantee is given as to its accuracy or completeness.

Reference to specific shares or companies should not be taken as advice or a recommendation to invest in them.

Third parties (including FTSE and MSCI) whose data may be included in this document do not accept any liability for errors or omissions. For information, visit www.artemisfunds.com/third-party-data.

Risks specific to Artemis UK Future Leaders plc investment trust:

Currency risk: The fund’s assets may be priced in currencies other than the fund base currency. Changes in currency exchange rates can therefore affect the fund's value.

Market volatility risk: The value of the fund and any income from it can fall or rise because of movements in stockmarkets, currencies and interest rates, each of which can move irrationally and be affected unpredictably by diverse factors, including political and economic events.

Income risk: The payment of income and its level is not guaranteed.

Smaller companies risk: Investing in small companies can involve more risk than investing in larger, more established companies. Shares in smaller companies may not be as easy to sell, which can cause difficulty in valuing those shares.

Counterparty risk: Investments such as derivatives are made using financial contracts with third parties. Those third parties may fail to meet their obligations to the fund due to events beyond the fund's control. The fund's value could fall because of loss of monies owed by the counterparty and/or the cost of replacement financial contracts.

Charges from capital risk: Where charges are taken wholly or partly out of a fund's capital, distributable income may be increased at the expense of capital, which may constrain or erode capital growth.

Leverage risk: The fund may operate with a significant amount of leverage. Leverage occurs when the economic exposure created by the use of derivatives is greater than the amount invested. A leveraged portfolio may result in large fluctuations in its value and therefore entails a high degree of risk including the risk that losses may be substantial.