# UK small caps: good things come in small packages

> UK small caps outperform larger stocks after decade of underperformance.
- Title: UK small caps: good things come in small packages · MoneyWeek
- Summary: UK small caps outperform larger stocks after decade of underperformance. UK small cap shares have rebounded after lagging for 10 years due to external…
- Keywords: uk small caps, ftse small caps, pension funds, mergers and acquisitions, investment trusts, market valuations, small cap stocks, uk equities, investment funds, market performance, MoneyWeek
- Source: MoneyWeek — https://moneyweek.com/investments/small-cap-stocks/uk-small-caps-good-things-come-in-small-packages
- Published: 2026-11-14T09:00:00+00:00
- Read time: 3 min
- Topics: uk small caps, ftse small caps, pension funds, mergers and acquisitions, investment trusts, market valuations, small cap stocks, uk equities, investment funds, market performance
## UK small caps lag market for decade
UK small caps have lagged the wider market by 5%-6% annually since 2010, according to Henderson Smaller Companies Investment Trust portfolio manager Cassie Herlihy.

> something of a lost decade for UK small caps
## External factors drive underperformance
The UK's exit from the EU, pandemic impacts, and inflation from the Russian invasion of Ukraine and Liz Truss mini-Budget have hurt small caps more than larger companies.
## Pension funds flee UK equities
British pension funds reduced UK equity investments from 50% to less than 5% of assets over 25 years, causing a 'massive outflow of money' that depressed prices.
## Valuations at historically low levels
UK small caps trade at 'exceptionally low' valuations, typically associated with extreme economic stress, despite the underlying economic situation not justifying such depressed levels.
## Catalyst needed for recovery
A catalyst such as improved economic conditions or institutional investment flows is needed to boost small caps, as low valuations alone won't guarantee a recovery.
## Institutional investment flows returning
Pension providers committed under the Mansion House Accord to invest 10% of workplace pensions in productive assets by 2030, with at least 5% earmarked for UK investments.
## M&A boom boosts small caps
Private equity firms and large companies are acquiring small caps at premiums of up to 169% over recent valuations, with £3.9 billion in deals involving FTSE Small Cap constituents this year.
## Best small cap investments
The iShares MSCI UK Small Cap UCITS ETF (LSE: CUKS) tracks the MSCI United Kingdom Small-Cap Net index with an average price-to-earnings ratio of 14.5 times and a total expense ratio of 0.53%.
## Keller Group: construction growth
Keller Group (LSE: KLR) has market capitalisation of £2.16 billion and sales grew by nearly half between 2020 and 2025, trading at 11.8 times 2027 earnings with a dividend yield of 2.7%.
## Sigmaroc: infrastructure opportunities
Sigmaroc (LSE: SRC) mines and refines minerals for construction, with market capitalisation of £1.39 billion and trades at ten times 2027 earnings.
## Boku: payment technology growth
Boku (LSE: BOKU) helps technology firms accept local payments, with market capitalisation of £366 billion and trades at less than 18 times expected 2027 earnings.
## Small caps: bottom-up approach
Investors should focus on companies with strong cash generation, high margins, low financial leverage, and management teams capable of driving improvement without relying on a strong UK economy.
## AI disruption fears exaggerated
Small companies are more agile than larger ones in responding to AI disruption, with many able to quickly adapt and take advantage of changes in the market.
## Green shoots of recovery
Small caps have outperformed larger caps over the last six months, with consumer confidence at a two-year high and GDP growth 'not awful' despite not being particularly strong.
## Pension funds: potential catalyst
Pension funds may increase UK investments through incentives or regulatory changes, with some already questioning the assumption that the US market will always outperform the UK.
## Market recovery outlook
UK small caps are expected to recover as valuations are low, institutional investment flows return, and M&A activity increases, with potential for strong returns in the coming years.
## Key takeaway

UK small cap shares have rebounded after lagging for 10 years due to external factors, with valuations now exceptionally low and potential for recovery through institutional investment and M&A activity.