In this latest FundCalibre podcast, Our interview with Katen Patel, co-manager of the JPMorgan UK Small Cap Growth and Income Trust, explores what could finally trigger a re-rating, why M&A activity is accelerating, and how share buybacks have become increasingly attractive for cash-rich companies.
UK small-caps have endured a difficult decade, but attractive valuations, stronger balance sheets and improving earnings trends are creating a compelling backdrop.
In this interview, Katen Patel covers opportunities in UK mid-caps, the benefits of an investment trust structure, overlooked companies at the smaller end of the market and the importance of international revenues.
He then finishes with how the portfolio balances capital growth with income.
Why you should listen to the interview: This interview explains why UK small-caps may offer much more than simply cheap valuations.
It explores rising takeover activity, improving cash generation, overlooked international businesses and opportunities below the radar, while showing how patient investors can benefit from both long-term growth and an increasingly attractive income profile.
This interview was recorded on 26 August 2026. Please note, answers are edited and condensed for clarity. To gain a fuller understanding and clearer context, please listen to the full interview.
Interview highlights:
What could finally trigger a re-rating in UK small caps?
“We’ve gone through many challenges over the last decade or so, post the referendum. We’ve had COVID, various Brexit negotiations, Russia-Ukraine and the Iran situation this year. Throughout that period, the small-cap index has continued to push on over the last decade or so, which is encouraging.
“That said, valuations are still incredibly attractive. In terms of catalysts, that’s one thing we do get asked by a lot of clients, and I don’t think there’s one particular catalyst. I think it will be a combination of things.
“In the last decade, probably two decades actually, we’ve seen huge outflows of money from the UK stock market, both in small caps and large caps, with pension funds, insurance companies and others reducing their holdings.
“I think we have reached a bit of a floor there. Allocations have come down to about 5% of portfolios from around 20% 20 years ago. So the outflows stopping is one of the key things.
“The other thing is obviously the economic side. To be fair, UK GDP has probably been slightly better than expectations this year. In the small-cap space, we haven’t really seen huge earnings downgrades.
“When this area of the market tends to perform well is when we have stabilisation in earnings trends and small upgrades coming through. That can come from the market simply being overly pessimistic about the outlook and things starting to look up.
“That could also be catalysed by interest rates starting to come down and growth starting to pick up.
“All of those things coming together are important. Clearly the political side is also vital, and perhaps some stability in this part of the market, which again we haven’t had for a long time, would be important.
“Perhaps regulatory drivers, encouraging more investment in UK domestic assets, could also help. All of those things coming together could help the UK small-cap space start to re-rate and perform as it has done in the past.”
When valuation discounts become difficult to justify
“It’s definitely been the case across various sectors. You look at valuations in the UK versus other markets, and particularly the US, where you’ve got companies with similar exposure and similar growth rates, but they’re trading at huge discounts in terms of valuation.
“We’ve seen it across financials, industrials, retail and other areas, including some very high-quality companies that have been around for a long time.
“One of our large holdings in the portfolio is a company called Four Imprint, which produces goods for corporates, so branded goods such as umbrellas, cups and so on that are given out at trade shows or to clients.
“Around 90% of its business is in the US. It’s a company that, over the last 15 years, has grown its top line by more than 10% a year. Earnings have grown at about 15% per year over a very long period of time.
“It has huge exposure to the US market, a very strong balance sheet and returns lots of cash to shareholders. Yet it is trading at probably two-thirds of the valuation it did 10 or so years ago. That is purely, I think, sentiment and some of the outflows that we’ve seen from the UK market.
“The catalyst, we don’t know what that is going to be. Hopefully, simply delivering earnings consistently and seeing expectations in the market being surpassed will help to re-rate those companies back towards where they were.
“The interesting thing is that the underlying businesses themselves can continue to perform perfectly well while sentiment towards the wider UK market remains weak.
“That creates an unusual situation where you can have a company with international revenues, a strong balance sheet, long-term earnings growth and substantial cash returns to shareholders, but still see it valued at a significant discount simply because of where it happens to be listed. For us, that creates opportunities.”
Why buybacks suddenly make sense for small companies
“When we’re having meetings with the management of these companies, we’re always speaking to them about how they’re allocating capital. We generally encourage them to invest back into their businesses, as long as there’s a proper hurdle rate on that investment and obviously the balance sheet is in good shape.
“But I think what we’ve seen in the last few years is that balance sheets have got stronger and stronger because of the geopolitical situation and volatility.
“At the same time, valuations have become so low that in many cases the best investment a company can make is buying its own shares. The returns they’re getting on that can be just as comparable as going out and spending the money on a new factory or whatever it may be.
“So we’ve absolutely changed our tune in the last year or two on that and been happy for companies to buy back their shares. But we also want them to balance that with reinvestment and, obviously, keeping their balance sheets in good shape.
“It’s very unusual in the small-cap space to see the level of buybacks we’re seeing, but I’d say that is very much because of balance sheets and where valuations have got to.
“Buybacks can also be turned on and off relatively easily. It’s much easier to do that than to establish a high dividend yield and then cut it later, because the market tends not to like that. So it’s a flexible way of keeping your powder dry while also returning some cash to shareholders.”
Why the smallest companies can offer the biggest opportunities
“We’re fortunate that we can invest in companies from around £100 million market cap, but we’ll start monitoring them before that, meeting the company and doing some analysis.
“There’s a real sweet spot, I think, between £100 million and £300 million where there are some fantastic companies doing well but trading at very attractive valuations.
“A recent one we’ve been investing in is a company called Cortex, which we’ve had for a little while now in the portfolio. They provide subscription-based vehicle telematics, tracking software and driver analytics.
“They’re often selling to small businesses in the UK and overseas. So imagine a small team of plumbers or electricians operating in their local community. The owner of that business can track those vehicles, make sure they’re on the most sensible route, see how long they’re spending at each job and optimise for that.
“This is a company that has delivered very strong growth. I think we entered at around £100 million market cap and it’s now around £200 million. It has opportunities to expand into the North American market, which is doing well, and it’s expanding into Europe as well. Again, it has a very strong balance sheet.
“These are the sorts of companies that hopefully have a 10, 15 or 20-year growth pathway ahead of them. We’ve picked up on them early and obviously have to be mindful of our position sizing because of liquidity, but the closed-ended structure allows us to invest in these sorts of companies.”
Conclusion: UK smaller companies remain deeply out of favour, but this discussion highlights why that may be creating opportunities for long-term investors.
“Attractive valuations, strong balance sheets, elevated free cashflow and persistent takeover activity all suggest parts of the market are being overlooked.
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The writer’s views are their own and do not constitute financial advice.
This information should not be relied upon by retail clients or investment professionals. Reference to any particular investment does not constitute a recommendation to buy or sell the investment.
Main image: Podcast, will-francis-ZDNyhmgkZlQ-unsplash
